Expert Insights

What You Should Know About Financial Markets Let time work in your favor. Let the market worry about itself. Financial markets are unpredictable. No matter how much research you do and how closely you follow the news, trying to “time the market” usually means withdrawing too early and investing too late. Most investors see better performance by focusing on the long game. With a diversified portfolio and a patient and disciplined approach, the more time you give your investments in the market, the better your portfolio performs. When you try to time the market, you also risk short-term capital gains taxes. Even if you make a profit with constant buying and selling, these taxes quickly eat into your gains. Hold your assets for over a year, and you’ll avoid these short-term taxes. If you do need to make adjustments, try to keep them to a minimum. The best way to adjust your asset allocation is to look at how much time you have to reach your goal. The closer it gets, the less risk you’ll want to take. Got more time? There’s more to unpack about financial markets. In 5 minutes In this guide, we’ll explain: Why a long-term strategy is often the best approach The problems with trying to time the market How to accurately evaluate portfolio performance How to make adjustments when you need to Why a long-term strategy is often the best approach Watch the market closely, and you’ll see it constantly fluctuate. The markets can be sky high one day, then come crashing down the next. Zoom in close enough on any ten-year period, and you’ll see countless short-term gains and losses that can be large in magnitude. Zoom out far enough, and you’ll see a gradual upward trend. It’s easy to get sucked into market speculation. Those short-term wins feel good, and look highly appealing. But you’re not trying to win the lottery here—you’re investing. You’re trying to reach financial goals. At Betterment, we believe the smartest way to do that is by diversifying your portfolio, making regular deposits, and holding your assets for longer. Accurately predicting where the market is going in the short-term is extremely difficult, but investing regularly over the long-term is an activity you can control that can lead to far more reliable performance over time. The power of compounding is real. By regularly investing in a well-diversified portfolio, you’re probably not going to suddenly win big. But you’re unlikely to lose it all, either. And by the time you’re ready to start withdrawing funds, you’ll have a lot more to work with. The basics of diversification Diversification is all about reducing risk. Every financial asset, industry, and market is influenced by different factors that change its performance. Invest too heavily in one area, and your portfolio becomes more vulnerable to its specific risks. Put all your money in an oil company, and a single oil spill, regulation, lawsuit, or change in demand could devastate your portfolio. There’s no failsafe. The less you lean on any one asset, economic sector, or geographical region, the more stable your portfolio will likely be. Diversification sets your portfolio up for long-term success with steadier, more stable performance. The problems with trying to time the market There are two big reasons not to try and time the market: It’s extremely difficult to consistently beat a well-diversified portfolio Taxes Many investors miss more in gains than they avoid in losses by trying to time a dip. Even the best active investors frequently make “the wrong call.” They withdraw too early or go all-in too late. There are too many factors outside of your control. Too much information you don’t have. To beat a well-diversified portfolio, you have to buy and sell at the perfect time. Again. And again. And again. No matter how much market research you do, you’re simply very unlikely to win that battle in the long run. Especially when you consider short-term capital gains taxes. Any time you sell an asset you’ve held for less than a year and make a profit, you have to pay short-term capital gains taxes. Just like that, you might have to shave up to 37% off of your profits. With a passive approach that focuses on the long game, you hold onto assets for much longer, so you’re far less likely to have short-term capital gains (and the taxes that come with them). You don’t just have to consistently beat a well-diversified, buy and hold portfolio. In order to outperform it, you have to blow it out of the water. And that’s why you may want to rethink the way you evaluate portfolio performance. How to evaluate portfolio performance Want to know how well your portfolio is doing? You need to use the right benchmarks and consider after-tax adjustments. US investors often compare their portfolio performance to the S&P 500 or the Dow Jones Industrial Average. But that’s helpful if you’re only invested in the US stock market. If you’re holding a well-diversified portfolio holding stocks and bonds across geographical regions, the Vanguard LifeStrategy Funds or iShares Core Allocation ETFs may be a better comparison. Just make sure you compare apples to apples. If you have a portfolio that’s 80% stocks, don’t compare it to a portfolio with 100% stocks. The other key to evaluating your performance is tax adjustments. How much actually goes in your pocket? If you’re going to lose 30% or more of your profits to short-term capital gains taxes, that’s a large drain on your overall return that may impact how soon you can achieve your financial goals. How to adjust your investments during highs and lows At Betterment, we believe investors get better results when they don’t react to market changes. On a long enough timeline, market highs and lows won’t matter as much. But sometimes, you really do need to make adjustments. The best way to change your portfolio? Start small. Huge, sweeping changes are much more likely to hurt your performance. If stock investments feel too risky, you can even start putting your deposits into US Short-Term Treasuries instead, which are extremely low risk, highly liquid, and mature in about six months. This is called a “dry powder” fund. Make sure your adjustments fit your goal. If your goal is still years or decades away, your investments should probably be weighted more heavily toward diversified stocks. As you get closer to the end date, you can shift to bonds and other low-risk assets. Since it’s extremely hard to time the market, we believe it’s best to ride out the market highs and lows. We also make it easy to adjust your portfolio to fit your level of risk tolerance. It’s like turning a dial up or down, shifting your investments more toward stocks or bonds. You’re in control. And if “don’t worry” doesn’t put you at ease, you can make sure your risk reflects your comfort level.

6 Tax Strategies That Will Have You Planning Ahead Here are six tax tips you can follow now to help save money on your taxes now—and for years to come. Most people tend to think about taxes just once a year—usually March or April. But investors can save more in taxes each year by thinking ahead and strategizing about their taxes on an ongoing basis. Today, savvy investors aren’t beating the market day-to-day; instead, they’re focused on taking home more of their earnings by lowering taxes and fees across their portfolio. That means thinking about all of your tax-advantaged options—accounts you have now and selections you’ll make in the future—to make every move as tax-efficient as possible. You can think of accounts like IRAs, 401(k)s, 529 accounts, and HSAs as unique opportunities that if implemented strategically, can help you earn more over time. In this article, we’ll introduce six tax strategies that require ongoing planning, but if taken into consideration, can help you keep more of what you earn. 1. Shelter dividends in retirement accounts. By reorganizing your investments, you can shelter many dividends from being taxed. This strategy, called asset location, can not only reduce your annual tax bill, but also help to increase your after-tax investment returns. At Betterment, we have a service called Tax Coordination that does this automatically. It works by placing investments that are taxed more into traditional and Roth IRA accounts, which have big tax advantages. It places investments that are taxed less, such as municipal bonds, in your taxable accounts. This is a great way you can use your current investments to help reduce your taxes. Here’s a simple animation solely for illustrative purposes: Asset Location in Action 2. Start tax loss harvesting earlier. Another way to use your investments to help reduce your taxes is through tax loss harvesting. By selling investments at a loss, you can generate a tax deduction. You can use this deduction to offset other investment gains you earned during the year, or even to decrease your taxable income by up to $3,000. Most investors only view tax loss harvesting as a year-end strategy to get some last-minute deductions, and thus won’t be able to benefit from any other losses throughout the year. A better strategy to consider is monitoring your portfolio throughout the entire year for opportunities to harvest losses. This is especially effective if you are in a high tax bracket or have large capital gains this year.  We automatically monitor for you on a daily basis here at Betterment if you use our Tax Loss Harvesting+ feature. 3. Contribute earlier to retirement accounts. It’s true that you have until each year’s tax filing date to contribute to your IRA for the previous year. However, if you’ve already maxed out your the previous year’s IRA contributions, consider maxing out this year’s IRA contributions as early in the year as possible—this can give you up to 15 extra months (January of this year to April of next year) in the market. Waiting until the last minute could cost you more than you think. In fact, funding your IRA in January every year could provide you with an average of $8,800 more over a ten-year period. So if you still haven’t funded your IRA for last year, consider doing it now instead of waiting until mid-April. 4. Execute Roth conversions in January, not December. A Roth conversion moves money from your traditional IRA to your Roth IRA and is sometimes referred to as a backdoor Roth IRA conversion. You may pay taxes when converting, but once inside your Roth IRA, future earnings and qualified withdrawals will be tax-free. You can convert your IRA at any point throughout the year, but most people wait until the last minute. Just like with procrastinating on your retirement account contributions, by waiting until December to convert, you’ll miss out on 11 months of potential tax-free growth. For this reason, consider doing your conversions early in the year to help maximize your tax-free growth. It may be worth speaking with a tax advisor if you’re worried about converting in January because you don’t have a clear enough picture of what your taxes for the year will look like, as the IRS recently removed the ability to undo Roth conversions. The tax code has been updated to reflect this change, which became effective January 1, 2018. This information is for educational purposes only and is not a substitute for the advice of a qualified tax advisor. Roth conversions can have significant tax implications and you should consult a tax professional to discuss any questions about your personal situation and whether a Roth conversion is right for you. 5. Put your tax refund to good use. If you’re like 72% of Americans, you receive a tax refund averaging around $2,825. That refund may sound great, but really that means, in this example, that you overpaid your taxes each month by about $236. That is money that could have been invested and growing for you throughout the year. To adjust how much money is withheld from each paycheck for taxes for the following year, you could consider resubmitting your Form W-4 to your employer. Making the change early in the year will allow it to take full effect, and filling it out properly can ensure the correct amount is taken out. The IRS has provided a Tax Withholding Estimator to help you set or adjust your W-4 to get your refund closer to $0 (meaning you aren’t giving Uncle Sam an interest free loan).  Then, consider putting that money to work throughout the year. After adjusting your W-4, consider increasing your 401(k) contribution by that same amount. You won’t notice a difference in your paycheck, and that money will go toward your retirement instead of loaning it to the IRS. 6. Make tax-smart investment switches. You can likely benefit from reviewing your investment portfolio, but it’s important to minimize the tax consequences of making any adjustments. Rebalance your portfolio tax-efficiently. One example of a change you might consider is rebalancing your portfolio. Here’s how it works: As markets move up and down, your portfolio can drift away from its target allocation. Rebalancing allows you to realign the weight of stocks and bonds so that your asset allocation is appropriate for your goal’s time horizon. However, rebalancing by selling existing investments should generally be a last resort because this can cost you in taxes. Instead, consider using cash flows to rebalance; use new deposits, dividends you earn, and proceeds from tax loss harvesting to rebalance your portfolio on an ongoing basis. This will minimize the need to sell investments and thus can help reduce your taxes. At Betterment, we automate this entire process to help keep your portfolio properly balanced with every cash flow. Get out of high-cost investments. Another tax-smart change you might consider is getting out of high-cost investments. Look for losses you can use to offset any gains associated with swapping a high-cost fund for a low-cost one. Even if switching out of the high-cost fund will cause you taxes, consider doing a breakeven analysis to see if it still makes sense. For example, if selling a fund will cost you $1,000 in taxes, but you will save $500/year in fees, you can break even in just two years. If you plan to be invested for longer than that, it can still be a savvy investment move. Our calculator can help you with this decision. Rebalancing and reducing fees are both important, but make sure you don’t ignore taxes while executing these strategies. Think About It Now—And Later We all talk about tax season, but really, taxes are a topic we should think about throughout the year as we invest our savings. Sheltering your tax-inefficient investments in your retirement accounts can reduce dividend taxes and help keep more money in your pocket. Tax loss harvesting throughout the year, not just in December, can reduce your taxes and help increase your after-tax investment returns. Retirement contributions and conversions done early in the year are more effective because they allow your investments to grow for longer. Correcting your tax withholdings can allow you to save more throughout the year, instead of having to wait for your tax refund. Lastly, don’t ignore possible tax implications while rebalancing or adjusting your investment portfolio. Together, these strategies may significantly reduce your tax bill. And by automating them by using a service like Betterment, you can take advantage of these strategies without adding stress during tax season. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

Should You Invest in Crypto? Q&A with Makara Co-founder Jesse Proudman We asked Makara co-founder and CEO, Jesse Proudman, a few questions about why he believes in crypto and how it compares to traditional markets. Crypto can democratize finance by removing gatekeepers and intermediaries present in the existing financial system. Crypto is intended to have no central approver, no hidden fees, and be completely transparent. Given the proliferation of the internet and the digitization of everyday life, cryptocurrency's transformative potential is clear. We see crypto as an investment, of course, but also as a way to redefine the future of money and what can be done with it. Our co-founder, Jesse Proudman, has been involved in digital assets since 2017. First it was as an investor, then systematically trading cryptocurrency as the founder of the quantitative hedge fund Strix Leviathan, and finally as a co-founder behind the launch of Makara. We asked him a few questions about why he believes in crypto, how it compares to traditional markets, and why, if you’re on the fence, he may not try to convince you to join him. What is it that you like so much about crypto? This is seemingly the first opportunity that all investors have had to participate in an evolving asset class from its inception. If you think about angel investing, startups, or real estate deals, participation is often reserved for a select few—these are selective investment opportunities and you usually have to be an insider to be a part of them. But with crypto, the same technology that makes it so innovative also is designed to make it open to all. With global liquidity, likely anyone on earth can invest across a breadth of offerings at any time and be a part of this innovative, evolving new technology. How does it compare to traditional markets? When you’re buying stocks, you’re buying equity in a company, equity that is reflective of ownership with specific and defined rights. In this landscape, you’re not buying equity in a company. You are instead buying participation in a network. You’re potentially buying the direct ability to influence that network via governance tokens. Investing in this asset class is akin to being part of a community. It’s a fundamentally different type of investment with its own risks. At the end of the day, these are behavioral markets, which makes it hard to say, “Bitcoin at $60,000 is expensive or reasonable.” That almost seems like it would make people more nervous. When you buy into a company, you can judge based on performance indicators. It’s true. In the stock market, there are valuation models that investors generally agree upon. There are understood ways, like price per earnings, to value a specific stock. While there are valuation models for crypto, they are still early and evolving. They’re not shared among enough market participants to have material weight. That means the reason you value Bitcoin at a certain level and the reason I do are probably very different. In our eyes, that’s simply an argument for long-term investing and diversification. Long-term investing gets a little harder during a bull market though, doesn’t it? If you bought Bitcoin at the top of 2017 and held it, certainly you went through a long and painful drawdown. It wasn’t until the fall of 2020 that your investment was back in the green. But if you did hold on to everything, between then and now, the value has almost doubled. These markets go through cycles, and the potential for recovery is always there. The general historical trend demonstrates that. What do you tell people about the value of altcoins, or anything that isn’t Bitcoin or Ether? There are a portion of crypto market participants that like to argue that Bitcoin is the only asset that matters and the rest are worthless. I think Bitcoin absolutely has systemic advantages as a function of being the first, the largest, the most well-known token. But to some extent, by that logic, as the first big search engine, Yahoo! would be the only one that matters. We’re so early in the life span of crypto that picking a singular winner based on its existing network feels like a weak argument to me. Of course there are different risks associated with Bitcoin, Ethereum, and the thousands of tokens, but the truth is we simply don’t know what will be the winners a decade from now. Does that mean you recommend investing in those other coins too? If you believe this asset class will continue to exist (and you have to believe that, if you’re willing to put your money into it), for the long-term horizon, I believe you have to diversify. If you do that well, you may be able to reduce your overall portfolio risk. How do you recommend people learn about all of the other coins? It seems like a daunting task.  It is, and while we do advocate for people learning about crypto, we don’t think you need to become an expert to invest. There are currently 17,000 tokens in existence. You can’t learn about all of them—and many aren’t worth learning about—but what you can do is check out our guide to the 54 (and growing) tokens we currently invest in. For each one, we give you a brief background and tell you why we think they matter. It’s our way of simplifying the learning process and helping you decide what to invest in. We also publish blogs covering crypto investing topics that only take a few minutes to read. How do you respond to people who are negative about crypto, or those who call it a bubble? It’s a speculative and emerging asset class that’s only existed for a decade, but that doesn't necessarily make it a bubble. That can create opportunity with commensurate risk. In some regard, all assets are speculative in nature. You wouldn’t buy stocks if you didn’t think they were going to appreciate, would you? The market goes through cycles. It has boom and bust cycles that repeat just like they do in any other market. But also, look at the debate that took place over the Senate Infrastructure Bill. If this is only a bubble, the Senate wouldn’t have argued so much about it, holding up more than $3 trillion in spending. Crypto is no longer “fake” internet money. This is a real thing with tangible markets, and it’s not going away. It’ll still be volatile, of course, but it’s not going away. Is crypto for everyone? I don’t think so. Like I said, it’s a volatile asset class, and if you expect it to consistently go up month after month and quarter after quarter, that’s just not what this is. It’s not a get rich quick opportunity either (although it certainly has been lucrative for some investors). Investing in crypto is investing in emerging technology. It has market cycles that you need to be aware of. You participate knowing that’s part of the experience. Some people aren’t into that, and that’s okay. Do you need a strong stomach for crypto? If you go into this with a diversified portfolio and the knowledge that a small percent of your net worth can experience outsize gains—and you also are in a position that losing your investment isn’t catastrophic—crypto shouldn’t feel nauseating. If it does, you maybe shouldn’t be in it, and that’s ok. How long did it take you to understand the market? It’s hugely complicated. It took me three months of full-time work before I had a general baseline understanding of everything. Even now, I’m in this all day and I still don’t understand everything that’s happening. That’s why it’s an intellectually engaging industry to work in.

What’s The Best Crypto to Buy Now? (Hint: There’s Not One) Here are three reasons why you shouldn't try to find the “best” cryptocurrency to buy now. (And what you can do instead.) If you decide to go on a Google search hunt for the best cryptocurrency to buy this year, you may find yourself down a rabbit hole in an unfamiliar and uncomfortable part of the internet. (Don’t worry, we’ve all been there at some point.) And if you don’t end up there, you may find yourself on one of the many generic investing websites, all offering you similar “top cryptocurrencies to buy in 2022” lists. You’ll find the usual suspects here, mostly based on market capitalization or even personal preference of the writer. It’s common for these lists to include Bitcoin, Ether, Solana, Cardano, Binance Coin, Polkadot, and Avalanche. All fair examples but no need to do a Google search at this point.  Instead of attempting to discover the next best cryptocurrency or token, we favor a different mental model. Ask yourself this question: What’s the best area of crypto to invest in, not now, but over the next three years? (Or whatever time horizon you are investing within.) You’ll see that trying to find the needle in the haystack—and it’s an incredibly large haystack—is probably not the best route to take. Rather, we recommend a more long-term, wide-reaching approach to selecting your investments. Three Reasons Not to Find the "Best" Crypto To sum it up, here are three reasons why you shouldn't try to find the “best” cryptocurrency to buy now. (And what you can do instead.) 1. You’re probably not a professional crypto investor. (And that’s perfectly OK.) If you are like nearly everyone, you’re not a professional crypto investor. Absolutely fine. Similar to any other asset class, non-professional crypto investors are at a disadvantage when it comes to technical resources, market data, and general industry knowledge. For example, at Makara, we have people whose job it is to research individual crypto assets and analyze the pros and cons of including them on our platform.  So instead of pretending to be a crypto day trader in search of a new token that’ll take you to the moon, we recommend staying on planet earth. One way to do this is to learn about broad sectors in crypto and decide for yourself which areas you think may have the most growth potential. Among other things, we’re talking about the metaverse, decentralized finance, and Web 3.0. You could take it a step further and read up on NFTs but you may just be tempted to right-click-save on a picture of an ape that for some strange reason you can’t stop staring at—avoid the temptation, for now. Read up on crypto sectors, and if you’re feeling up to it, try explaining them to your friends or family to see if you grasp the important notes. This approach will give you a wider understanding of the crypto industry and pairs well with our next two recommendations.  2. You don’t have enough time. (Join the club!) Making wise investment decisions takes time. One of the best investors to ever live, Warren Buffet, reads 80% of his day. We’re going to guess you can’t spend 80% of your day reading about crypto. So how do you make up for this? As we said, educate yourself about crypto industry sectors instead of searching for individual assets. But don’t stop once you can explain what the metaverse is and why it could change the future. Yes, you are short on time, but if you have done the work to understand sectors in crypto and are interested in investing, you have two very important questions to ask yourself: How much do I want to allocate into crypto? And what is my time horizon? These are very personal questions. And with the little time you do have, ones worth thinking about. Knowing the amount you are comfortable investing and when you need to withdraw the funds will help you better understand the risks and make a decision that lets you sleep at night. We like sleep. 3. You’re increasing your risk. (Not a good thing.) Investing in one cryptocurrency is not quite comparable to putting all of your eggs in one basket. It’s more like having one egg. One cryptocurrency, like one egg, can be fragile, or in financial language, volatile and prone to losses. It lacks any diversification within the crypto asset class. Diversification is a complex subject, but generally speaking, the goal of diversification is to invest in uncorrelated assets to reduce the risk of losses in a portfolio while enhancing its expected return. Moral of the story: we recommend diversification. Consider how your crypto investments fit into your larger diversified portfolio of uncorrelated assets. Within crypto, you can consider spreading your investments across multiple assets and even multiple sectors within crypto. One way of thinking about it is since predicting the future is near impossible, diversification sets you up for various outcomes. We built crypto baskets at Makara to give you the choice to invest across the crypto asset class in the metaverse, Web 3.0, or decentralized finance. We even have a basket encompassing all assets on the platform called the Universe Basket.  Your To-Do List for Finding the Best Crypto Assets Step 1: Read up on broad crypto sectors. Step 2: Know how much you want to invest and for how long.  Step 3: Select diversified investments. Rinse and repeat.

Save Taxes When Withdrawing in Retirement A smart withdrawal strategy during retirement can help make your portfolio last longer, while also easing potential tax burdens. When you retire, you can no longer count on a paycheck to fund your lifestyle. Though you may have some sources of fixed income, such as from Social Security or defined benefit pension plans, the income from these sources may not be enough to cover all of your regular expenses. That can leave you relying on the money from your investment portfolio to maintain your expenses and lifestyle. As a smart investor, you probably already have an idea of how much money you can safely spend during each year of retirement. But still, one important question remains: In which order should you withdraw from your accounts? While the true answer to this question depends largely on your individual circumstances, your actions can have a huge impact on both your tax bill and the longevity of your portfolio. Taxes will likely be one of your largest expenses in retirement (on par with healthcare), so a smart withdrawal strategy is crucial to your retirement success. Luckily, you often have more control over your taxes in retirement than at any other point in your life. While there are common strategies to follow, there are other more advanced strategies that could lead to substantial tax savings. At Betterment, we’ve established some guidelines to not only help build a smart retirement income plan, but to also try to save on taxes by establishing an order in which you should withdraw from your various investment accounts in retirement. But first, let’s examine how your money is taxed when withdrawn in retirement. How Withdrawals Are Taxed Before creating your retirement income strategy, you must first understand how withdrawals from your various accounts are taxed. We’ll explain the typical tax consequences by taxable, tax-deferred, and tax-free accounts. Taxable Accounts (individual, joint, and trusts): Investment income, such as dividends or interest income, is generally taxed in the year it is received. Any withdrawals are subject to capital gains tax, but only on the growth of the investment—not the principle. Tax-Deferred Accounts (Individual Retirement Accounts (IRAs), 401(k)s, 403(b)s, and Thrift Savings Plans): Unlike taxable accounts, no taxes are due on investment income or growth—until you make a withdrawal. When you do take money out, that full amount is subject to ordinary income tax. You are essentially delaying the payment of taxes. Tax-Free Accounts (Roth IRAs or Roth 401(k) plans): All investment income, growth, and withdrawals are tax-free, if meeting the requirements for a qualified distribution. Taxes on Withdrawals Vary By Account Type As you can see, pulling money from each of these account types (taxable, tax-deferred, and tax-free) can have very different tax consequences.   A Withdrawal Strategy for Tax Efficiency The ideal order for withdrawing money from your various accounts during retirement is as follows: First, pull money from your taxable accounts. Once those accounts are depleted, begin withdrawing money from tax-deferred accounts. Lastly, take money out of tax-free accounts. The reason that this strategy is generally most tax-efficient is the power of tax deferral and the compound growth that it provides. The longer you can shelter your tax-deferred and tax-free accounts, the better. That means more money stays in your accounts and can grow over time. Let’s look at how this order of operations works in more detail. Example: Why You Should Withdraw From Taxable Accounts First If you decide to withdraw money from your Traditional 401(k), every dollar will be taxed as ordinary income, which is the highest tax rate to which you could be subjected. In this hypothetical example, let’s say you need $1,000 and you are in the 24% marginal tax bracket. To end up with a net of $1,000, you would actually have to withdraw $1,316, because of the additional tax liability: $1,316 (amount withdrawn) x 24% (marginal tax bracket) = $316 (taxes owed) However, if instead you first pull money out from your taxable individual account, two things happen. First, as long as the money has been invested for over one year, the tax rate on your sold assets is lower. Long-term capital gains taxes are generally 15%.1 Second, you don’t pay taxes on the full withdrawal, only on the growth. If you bought the investment for $600, you only have to withdraw $1,071 to end up with a net of $1,000: $1,071 (amount withdrawn) – $600 (your basis) = $471 (capital gain) x 15% = $71 (taxes owed) A $1,316 withdrawal versus a $1,071 withdrawal results in a difference of $245 that gets to stay invested and potentially grow for a longer period of time. The benefit of tax deferral is clear. With Roth accounts, it gets even better. Money inside a Roth will never be taxed again if you meet the qualified distribution rules, so you keep 100% of all growth or income you earn. This is why tax-free accounts should generally be the last accounts you touch. Incorporating Minimum Distributions Generally, once you reach age 72, you must begin taking Required Minimum Distributions (RMDs) from your tax-deferred (non-Roth IRA) accounts. Not doing so will result in a 50% penalty on the amount you were supposed to take. This changes things—but only slightly. At this point, you’d want to follow these new steps: First, withdraw your RMDs. If you still need more, then you can pull from taxable accounts. Once depleted, start withdrawing from your tax-deferred accounts. Lastly, pull money from tax-free accounts. Supercharge Your Withdrawal Strategy You’ve seen the power of tax deferral, but if you’re a Betterment customer, there are other ways in which we help make your retirement income plan even more effective. Specific Lot Selection: When you make a withdrawal, we automatically sell investments that are at a loss first, which helps minimize your current tax hit. Account Specific Asset Allocation: We put tax-efficient asset classes (such as municipal bonds) in your taxable accounts, rather than in your tax-sheltered accounts. Both of these strategies seek to further optimize your tax withdrawal strategies. We execute on these tactics for you so that you can keep more money inside your accounts where it is able to grow. The Problem of Roller Coaster Income Unfortunately, putting a plan into action is always more complicated than in theory. In retirement, you will likely have multiple sources of non-investment income coming from Social Security, defined benefit pensions, rental income, part-time work, and/or RMDs. However, these fixed income streams do not all begin or end at the same time, and some can vary from year to year, just as a roller coaster goes up and down. This can cause your tax bracket and your spending needs to fluctuate throughout retirement, adding a layer of complexity to your retirement income plan. At first glance, these fluctuations seem to make creating a retirement income plan more difficult. Does the recommended strategy stated above, then, still apply? In most cases, yes. And with a little extra planning, you may actually be able to use these swings to your advantage. Smooth Out Bumps in Your Tax Bracket For most years, Betterment recommends pulling from taxable accounts first, then tax-deferred accounts, and tax-free accounts last. However, you should look for abnormal years of high and low income fluctuations and their associated tax brackets, then plan accordingly. By temporarily altering the above strategy, you can “smooth” out your tax bracket throughout retirement and reduce taxes. Lower Income, Lower Tax Bracket Some years you may find yourself in a lower bracket than usual. During these years, it may make sense to fill these low brackets with withdrawals from tax-deferred accounts before touching your taxable accounts, and possibly consider Roth conversions. Common examples of low-bracket years may occur when: You retire before you plan on claiming Social Security benefits. You have large balances in your IRA/traditional 401(k) that will cause future RMDs to bump you into higher brackets. Higher Income, Higher Tax Bracket On the other hand, you may have years where you are in an abnormally high tax bracket. In this case, it may make sense to pull from tax-free accounts first to minimize the effect of higher tax rates. Remember, higher taxes mean larger withdrawals and less money staying invested. Common examples of high-bracket years occur when: You sell a home or rental property and end up with large capital gains. You are working part-time in retirement and have a good year financially. You lose a large deduction, for example, perhaps you pay off your mortgage. Federal Income Tax Brackets (2022) Tax Rate Single Married 10% $0 – $10,275 $0 – $20,550 12% $10,276 - $41,775 $20,551 - $83,550 22% $41,776 - $89,075 $83,551 - $178,150 24% $89,076 - $170,050 $178,151 - $340,100 32% $170,051 - $215,950 $340,101 - $431,900 35% $215,951 - $539,900 $431,901 - $647,850 37% $539,901 + $647,851 + Source: Internal Revenue Service Tax Diversification The ability to pull from different accounts and smooth out your tax bracket requires having money invested in at least two, but ideally three tax pools, which are taxable, tax-deferred, and tax-free. We call this tax diversification, and it gives you the flexibility you need in retirement. Many customers have the majority of their savings in Traditional 401(k)s and IRAs, and little to no money in Roth accounts. That means you have no choice as to the order in which you withdraw from your investments, and you will pay taxes accordingly. Most retirees should seek to have some money in all three tax pools. The benefits of investment diversification are well known and often talked about, but tax diversification is not something that is often discussed. Generally, the only way to get money into each tax pool is by making direct contributions. However, a Roth conversion can be a powerful strategy to move money between tax pools. Building a tax-efficient retirement income plan is one of the main reasons tax diversification is so important. Extend The Life Of Your Portfolio Having a retirement income plan that incorporates taxes can extend the life of your portfolio. In general, we recommend you withdraw from your taxable accounts first, then your tax-deferred accounts, and lastly from your tax-free accounts. Implementing strategies such as Tax Loss Harvesting+, specific lot selection, and account specific asset allocation can further reduce or delay taxes. You should also smooth out any bumps in your tax bracket during retirement by accelerating tax-deferred withdrawals during low tax years and choosing tax-free withdrawals during high tax years. To do this, you must have money in all three “tax pools” (taxable, tax-deferred and tax-free). We call this tax diversification. Please note that Betterment is not a tax advisor. While we suggest everyone consult a tax professional to discuss their particular situation, those with more complicated situations such as complex estate planning or charitable giving may also want to consult an estate planning attorney. Even in such cases, we hope that these guidelines will still provide a solid foundation for your retirement income strategy. This article is intended to be educational in nature, and not meant to be relied upon as tax or investment advice. 1 As of the date published, long-term capital gains are generally taxed at 15%. However, if your taxable income is greater than $459,750 ($517,200 married filing jointly), you will pay 20% on long-term capital gains. An additional 3.8% Medicare Surtax also applies to those whose MAGI is above $200,000 single/$250,000 married filing jointly. Still, the tax rate on these long-term capital gains will be lower than your tax rate on ordinary income, so the reasoning still applies. Conversely, taxpayers with taxable income below $41,675 ($83,350 married filing jointly) pay 0% tax on long-term capital gains, making this strategy even more appealing.

How to Build an Emergency Fund An emergency fund keeps you afloat when your regular income can’t. Learn how to start one and grow it. In 10 seconds An emergency fund keeps you afloat when your regular income can’t. Try saving at least three months’ worth of expenses, so your finances can handle a sudden job loss or medical emergency. In 1 minute An emergency fund helps protect you from the most common financial crises. It helps cover unexpected expenses that don’t fit into your regular budget, and buys time to find a new job or manage a transition. For most people, the goal is to have enough funds set aside to pay for at least three months of living expenses, including food, housing, and other essential costs. But exactly how much you need depends on your situation. If you have more dependents or greater risks, you may need more than that to feel comfortable. Ideally, you should automate deposits into your emergency fund to make sure it grows each month until it reaches an appropriate size. You may also want to put this money into a cash account or low-risk investment account to help it grow faster, as long as you are ok with taking on this risk. Betterment makes both of these options easy, and with recurring deposits, you can make steady progress toward your goal. In 5 minutes In this guide we’ll cover: Why you should build an emergency fund How much you should save How to grow your emergency fund You can’t anticipate every financial disaster. But with an emergency fund, you can reduce their impact on your life. It’s a special account you don’t touch until you absolutely need to. If you’re like most people, this is one of your first and most important financial goals. Without an emergency fund, you could find yourself taking on high-interest debt to avoid losing your home. Or unable to meet basic needs, you may have to make hard choices about which necessities to live without.  So, how much should you save? What should you do with the money you set aside? And what counts as “an emergency”? Your emergency fund is personal. It needs to fit your life, your needs, and your risks. Some may only need a few thousand dollars. Others may need tens of thousands. It all depends on your regular expenses and how prepared you want to be. How large should your emergency fund be? For most people, the goal is to have enough to cover at least three months of expenses. That’s rent or mortgage, utilities, food, and anything else you pay every month. If you unexpectedly lost your job or had a medical crisis, your emergency fund should be enough to help you through most transitions.  Some folks should save more. If you’re a single parent or the only person with income in your household, a sudden loss of income would have a greater impact. If you work in an industry with high turnover, or you have a serious medical condition, you’re more likely to need these funds, so you may want to save more, such as six months of your monthly expenses. It may help to think of your emergency fund as time. This isn’t just a target dollar amount. It’s months of time. How long would you like to keep the bills paid without a job? How much would it take to do that? That’s the amount you should save. There’s no magic number that’s right for every person. And since it’s based on your current cost of living, the amount you’ll want to save will change with your expenses. Live more frugally, and you may be more comfortable with a smaller emergency fund. Get a bigger house or apartment, add a family member, or spend more on basic needs, and you’ll need a bigger emergency fund. How to build an emergency fund The hardest part of building an emergency fund is figuring out how saving fits into your life. It helps to work backward from your goal. Once you know how much you need to save, decide when you want to save it by. The sooner the better, but choose a timeline that makes sense for you. Then break your goal into chunks—how much do you need to save each month or each paycheck to get there on time? The last part is easy. Make your savings automatic with recurring deposits. You make the commitment once, then see steady progress toward your goal. You don’t have to think about it anymore. Set up a Safety Net goal with Betterment, and we’ll take care of this for you. Set how much you want to save and when you want to save it by, then decide how much you can put toward that goal each month. Create a recurring deposit, and you’ll start saving automatically. This video sums it all up.   Where should you put your emergency fund? A lot of people put their emergency fund in a savings account at a bank. It keeps their money liquid, and it’s federally insured by the FDIC. So there’s little risk of losing what you’ve saved. Obviously, you want your emergency fund to be there when you need it, so it’s understandable why so many people are drawn to savings accounts. But it may not be the best way to grow your fund, either. Most savings accounts generate so little interest that they’re basically cash. It’s a step above putting money under your mattress. And like cash, savings accounts will usually lose value over time due to inflation. Thankfully, you have options. You can generate more interest without taking on much more risk. Here are some alternative places to put your emergency fund. High Yield Cash Account Like a regular savings account, most cash accounts are federally insured. But unlike a traditional savings account, these can generate meaningful interest. A high yield account takes your money further, and it’s still highly liquid. Certificate of Deposit (CD) A certificate of deposit, or CD, is basically a short-term investment. It lasts for a fixed duration, such as 12 months or 5 years. At the end of this period, the CD “matures,” and you typically earn more interest than you would with a high yield cash account. CDs are federally insured and still very low risk, but until your CD matures, it’s not liquid unless you pay a penalty to get out of the CD early. This makes it a little riskier for an emergency fund, since you never know when you’ll find yourself in a crisis. Low-Risk Investment Account Investment accounts can offer greater growth potential in exchange for taking on more risk. While stocks are considered volatile because they frequently change in value, bonds are generally more stable. An investment portfolio consisting of all bonds can still outpace a CD, a high yield account, and inflation, while putting your emergency fund at significantly less risk when compared to a portfolio consisting entirely of stocks. If you feel investing is the right move for you, Betterment recommends giving yourself a bigger buffer, adding 30% to your target amount. That way your money can grow faster, but it’s also protected against potential losses.

What’s An Investment Portfolio? And why it's best to choose one suited to your goals and appetite for risk. In 10 seconds An investment portfolio is a collection of financial assets like stocks, bonds, and funds built around your goals and the level of risk you’re comfortable with. In 1 minute The investment portfolio that’s right for you depends on your goals and the level of risk you’re comfortable with. What do you want to accomplish? How fast do you want to reach your goals? What timeline are you working with? Your answers guide which kinds of assets might be best for your portfolio—and where you’ll want to put them. When choosing or constructing an investment portfolio, you’ll need to consider: Asset allocation: Choose the types of assets you want in your portfolio. The right asset allocation balances risk and reward according to your goals. Got big long-term plans? You may want more stocks in your portfolio. Just investing for a few years? Maybe play it safe, and lean more on bonds. In 5 minutes In this guide, we’ll: Explain what an investment portfolio is Explore the types of assets you can put in your portfolio Discuss how risk and diversification influence your portfolio Explain how to choose the right investment portfolio What’s an investment portfolio? When it comes to your financial goals, you don’t want your success or failure to depend on a single asset. An investment portfolio is a collection of financial assets designed to reach your goals. The portfolio that can help you reach your goals depends on how much risk you’re willing to take on and how soon you hope to reach them. Whether you’re planning for retirement, building generational wealth, saving for a child’s education, or something else, the types of assets your portfolio includes will affect how much it can gain or lose—and how long it takes to achieve your goal. What assets can your portfolio include? Investment portfolios can include many kinds of financial assets. Each comes with its own strengths and weaknesses. How much of each asset you include is called asset allocation. Cash can be used right away and carries very little risk when compared to other asset classes. But unlike most other assets, cash won’t appreciate more than inflation. Stocks represent shares of a company, and they tend to be more volatile. Their value fluctuates significantly with the market. More stocks means more potential gains, and more potential losses. Bonds are like owning shares of a loan whether made directly to companies or governments. They tend to be more stable than stocks. There’s less potential for gain over time, but less risk, too. Commodities like oil, gold, and wheat are risky investments, but they’re also one of the few asset classes that typically benefit from inflation. Unfortunately, inflation is pretty unpredictable, and commodities can often underperform compared to other asset classes. Mutual funds are like bundles of assets. It’s a portfolio-in-a-box. Stocks. Bonds. Commodities. Real estate. Alternative assets. The works. For a fee, investors like you can buy into a professionally managed portfolio. Exchange traded funds (ETFs) are similar to mutual funds in composition–they’re both professionally-curated groupings of individual stocks or bonds–but ETFs have some key differences. They can be bought and sold throughout the day, just like stocks—which often makes them better for tax-loss harvesting. They also typically have lower fees as well. ETFs are an increasingly popular portfolio option. Why diversification is key to a strong portfolio. Higher levels of diversification in your investment portfolio allow you to reduce your exposure to risk that hopefully will result in achieving your desired level of return. Think of your assets like legs holding up a chair. If your whole portfolio is built around a single asset, it’s pretty unstable. Regular market fluctuations could easily bring its value crashing to the floor. Diversification adds legs to the chair, building your portfolio around a set of imperfectly correlated assets. With a diverse portfolio, your gains and losses are less sensitive to the performance of any one asset class and your overall portfolio becomes less volatile. Price volatility is unavoidable, but with the right set of investments, you can lower the overall risk of your portfolio. This is why asset allocation and diversification go hand-in-hand. As you consider your goals and the level of risk you're comfortable with, that should guide the assets you choose and the ratio of assets in your portfolio. How to align your portfolio with your goal. Since some asset classes like stocks and commodities have greater potential for significant gains or losses, it’s important to understand when you might want your portfolio to take on more or less risk. Bottom line: the more time you have to accomplish your goal, the less you should worry about risk. For goals with a longer time horizon, holding a larger portion of your portfolio in asset classes more likely to experience loss of value, like stocks, can also mean greater potential gains, and more time to compensate for any losses. For shorter-term goals, a lower allocation to volatile assets like stocks and commodities will help you avoid large drops in your balance right before you plan to use what you’ve saved. Over time, your risk tolerance will likely change. As you get closer to reaching retirement age, for example, you’ll want to lower your risk and lean more heavily on asset classes that deliver less volatile returns—like bonds.

3 Low-Risk Ways To Earn Interest Earning interest usually means taking on risk. But with bonds, cash accounts, and compound interest, you can keep that risk as low as possible. In 1 minute When you don’t have much time to reach your goal, you can’t afford to make a risky investment. Thankfully, you can earn interest without putting everything on the line. Here’s how. Bonds Bonds are one of the most common types of financial assets. They represent loans, which a business or the government uses to pay for projects and other costs. Just as you pay interest when you take out a loan, bonds pay investors interest.You’ll typically see lower returns than you might with stocks, but the risk is generally lower, too. Cash accounts Cash accounts are similar to traditional savings accounts, only they are designed to earn more interest (and may come with more restrictions). These are great when you need your money to be readily available to you, but still want to earn some interest. And to top it off, many cash accounts are offered at or through banks so your deposits are FDIC insured, so there’s minimal risk. Compound interest The longer you invest, the more time you have to earn compound interest. This is the interest you earn and the interest your interest earns. That’s right. As you accrue interest, that interest makes money and that money in turn makes more money. The more frequently your interest compounds, the more you can earn. In 5 minutes Want to earn interest? You usually have to take some risk which means you could lose some money. Financial assets can gain or lose value over time. And investments that have the potential to earn greater interest often come with the risk of greater losses.  But there are ways to lower your risk. If you have a short-term financial goal or you’re just cautious, you can still earn interest. It might not be much, but it will be more than you’d get keeping cash under your mattress (don’t do that). In this guide, we’ll look at: Bonds Cash accounts Compound interest Bonds Bonds are basically loans. Companies and governments use loans to fund their operations or special projects. A bond lets investors help fund (and reap the financial benefits of) these loans. They’re known as a “fixed income” asset because your investment earns interest based on a schedule and matures on a specific date. Bonds are generally lower-risk investments than stocks. The main risks associated with bonds are that interest rates can change, and companies can go bankrupt.  Still, these are typically fairly stable investments (depending on the type of bond and credit quality of the issuer), making them ideal for a short-term goal. With municipal bonds, you can earn tax-free interest. These bonds fund government projects, and in return for the favor, the government doesn’t tax them. Invest in your own state, and you could avoid federal and state taxes. Even when your goal is years away, including bonds in your investment portfolio can be a smart way to lower your risk and diversify your investments. Learn more about how earning interest and bond income works at Betterment. Cash accounts Cash accounts seek to earn more interest than a standard savings or checking account, and they’re federally insured by the FDIC or NCUA. (This is usually the case but depends on the institution housing your deposits (i.e., banks or credit unions). Check to make sure your account is insured before depositing any money.) In most cases, there’s little risk of losing your principal. Your interest is based on the annual percentage yield (APY) promised by the bank or financial institution you open the account with. One of the great perks of a cash account is that it’s highly liquid—so you can use your money when you want. It won’t earn as much interest as an investment, but it won’t be as tied up when you need it.  For short-term financial goals, a cash account works just fine. The key is to choose an account that meets your needs. Pay attention to things like minimum deposits, transaction limits, fees, and compound frequency (that’s often how it accrues interest). These differences affect how fast your savings will actually grow and how freely you can use it. Compound interest Compound interest refers to two things:  The interest your investments or savings earn The interest your interest earns It’s your money making more money. If you want to build wealth for the long-term, investing and allowing your interest to compound is one of the smartest moves you can make. The sooner you invest and put your money to work, the more you can expect to have down the road. Compound interest starts small, but it grows exponentially. Over the course of decades, it can easily become hundreds of thousands of dollars depending on how much you invest upfront. Your investment grows faster because your interest starts earning interest, too. If you start young, you have a huge advantage: time is on your side! The graph below shows that if you invest over time, compound interest can grow your portfolio much quicker than just saving cash over time. With interest, you need to know how often it compounds. There’s a huge difference between interest that compounds daily, monthly, and annually. The more frequently it compounds, the more interest you earn.

How to Make a Tax-Smart Investment Switch Calculate the value of realizing gains to move to a potentially better investment. A customer once called us to discuss moving significant assets from another provider to Betterment. He asked if he would have to pay a one-time tax cost to liquidate, and considering that cost, would the switch still be worth it? We thought we'd share with everyone a way to figure out the cost and benefits of switching. Depending on your particular circumstances, the answer is likely yes to both questions—selling off a long-established portfolio may trigger taxes, but in the long term, it can be worth it. As an example, you might want to move out of an actively managed mutual fund. Research has shown that a portfolio of actively managed funds is expected to underperform by 1.01% a year on average, after fees, compared to an all index-fund portfolio. Or perhaps you're interested in lowering your fees over the long term or diversifying your investments from a single stock to a multi-asset class portfolio. While nothing in this piece should be construed as tax advice, since individual circumstances can vary greatly, the following should serve as a general illustration of the cost and benefit of transitioning to a potentially better investment. Informed Trade-Offs The key here is making an informed trade-off—you may trigger a tax bill today by selling your current holdings, but if you're in it for the long haul, moving to a better portfolio consisting of all index ETFs should make up for that tax cost. The real question to ask yourself when looking to move your investments to Betterment is: How long do I intend to hold this investment for? If you’re a short-term investor and plan to hold assets for a couple of years, or less, there's not much to gain from transitioning to a more efficient portfolio (although it should be noted that under this scenario, you'll realize the capital gains very soon in any case.) And as a general rule, you should only consider moving appreciated investments that you've held for more than a year in order to qualify for long-term capital gains on liquidation. If your investments have not appreciated since you bought them, or if they are held in an IRA or 401(k), you can generally transition them tax-free.1 Tax Cost vs. Excessive Fees The process by which we pay tax versus fees on our investments subtly biases us to overestimate the impact of taxes, and underestimate the impact of fees. Fees are generally taken out of returns before they ever hit our accounts—it's money we never even see. Tax on realized capital gains is assessed for an entire year, and results in a clear and visible liability, paid out of funds that are already in your possession. It's no wonder that irrational tax aversion is a well-documented, widespread phenomenon, whereas millions of people unwittingly go on paying unnecessarily high fees year after year. Your key decision boils down to comparing the long-term benefit of switching to a potentially better investment and paying more upfront tax, versus staying put in a portfolio of less optimal investments with higher expenses (that might also be a drain on your time, which is worth something). It's also important to keep in mind that unless you gift or bequeath your portfolio, you will one day pay tax on these built-in gains. Tax deferral is worth something, but how much? The 3 Key Financial Drivers to Consider 1. You could be invested in better assets. Take a hard look at your investor returns in your current investments. Could they be better? If you’re invested in actively managed funds, you may be losing, on average, 1.01% in returns, compared to an all index-fund portfolio, research shows. Betterment’s portfolio is made up entirely of index-tracking ETFs. 2. Automation and good behavior drive returns. We automatically take care of maintaining your investments for you—including rebalancing, dividend reinvestment, diversifying, tax efficiency, free trades and more. If you’re handling your own investments, consider what you're missing (and also how you're spending your time.) We perform automatic, regular rebalancing, which is expected to add 0.4% to returns, on average; a global, diversified portfolio is expected to add 1.44% in returns as compared to a basic two-fund portfolio and the average Betterment customer has enjoyed a behavior gap that's narrower by 1.25% as compared to the average investor. All told, including the demonstrated benefit of index funds—these advantages are expected to contribute to returns over the long run. 3. If you're paying what a typical mutual fund charges, you could be paying much less in fees. The average expense ratio for a hybrid (stock and bond) mutual fund is 0.79%.2. Betterment’s underlying ETF portfolios have an average expense ratio of 0.06% to 0.17%, depending on your allocation. Note that the range is subject to change depending on current fund prices. Our management fee is either .25% or .40%, depending on your plan. Your all-in cost at Betterment is between 0.31% and 0.57%. As smart investors know, every basis point matters.3 Taxes are a cost, but generally a cost you'll eventually pay anyway. Meanwhile, the cost of being in a sub-optimal investment over the years can far outweigh any benefit of tax deferral. Need a second opinion? If you’re still not sure if transferring your taxable portfolio is worth the upfront costs, we can weigh in. If your taxable portfolio holds more than $250,000 in assets, stop stressing and simply reach out to our licensed transfer specialists at concierge@betterment.com. The team can review the specifics of your portfolio and provide you with a recommendation on how to best move—or not move—your assets to Betterment. 1 The discussion here only applies to taxable investment accounts. All types of IRAs (traditional and Roth) and 401(k)s don’t typically trigger taxes when rolling over from one provider to another. (An exception is converting from a traditional IRA to a Roth, which will trigger taxes. However, there are smart ways to lower these, too.) 2 2021 Investment Company Fact Book 3 We've updated our pricing structure since this article was published. Learn more at betterment.com/pricing.

9 Tax Planning Moves to Consider Before 2021 Ends As we approach the end of the year, keep in mind year-end financial opportunities, especially tax-smart moves that could help you keep more of what you’ve earned. As we approach the end of the year, many people think about the holidays and year-end family gatherings. While I enjoy seeing my family and eating peanut butter sugar cookies, I also try to keep in mind all of my year-end financial opportunities—especially those that could shape my taxes for 2022. While your December may be bustling with merriment, consider the numerous actions you can take to help make your experience of filing taxes a little sweeter—and the amount you take home after taxes potentially a little higher. Turn on Tax Loss Harvesting+ by Dec. 30. In 2021, stock and bond markets have seen both ups and downs. These fluctuations are part of the pursuit for potential higher long-term returns. When assets fall in value, Betterment can take advantage of it by capturing losses that you may be able to use against gains on other investments (or offset $3,000 in other income). Tax Loss Harvesting+ is a one-time decision for you to turn on and Betterment takes care of the rest. Even if you do not use all the losses currently, no worries, you can carry them forward into future years. See if TLH+ is right for you. Make a 2021 IRA contribution by Dec. 30. Saving in an IRA can be a powerful way to help meet your retirement goals. These tax-advantaged accounts can potentially provide a tax deduction (Traditional IRA) or tax-free withdrawals (Roth IRA). The 2021 IRA contribution deadline is April 15, 2022, but maxing out by the end of 2021 will help you start making 2022 IRA contributions right after the new year. For 2021, contribution limits for IRAs are $6,000 if you’re under age 50, and $7,000 if you’re over 50. Max out your 2021 IRA here. Donate to charity—ideally, your appreciated shares. If you’re like me, you’ve come to realize giving can mean more than receiving. Charitable giving is one approach to supporting your community and our broader society. It’s also a way to optimize your taxes. We at Betterment suggest that a tax-smart way to make charitable donations is by giving away appreciated investments, rather than cash. We help you do this by automatically identifying the most appreciated long-term investments and partnering with charities you can donate to. This strategy allows you to avoid capital gains taxes and potentially deduct more on your taxes. To have deductions that count, you’d have to itemize your deductions above the standard deduction (which is $12,550 for individuals), so you may want to consider “bunching” a couple years’ worth of charitable contributions. Start a donation here. IRA’s Required Minimum Distributions (RMDs). IRS rules require that traditional IRA owners start withdrawing a certain portion of their account every year once they attain age 72. If the distribution is not taken by the deadline, the IRS imposes a 50% penalty on any shortfall. If the deadline is missed, the withdrawal still needs to be taken and the regular taxes still need to be paid. For some high income individuals, the penalty plus the taxes could exceed the required distribution. If you are not sure what your RMD is for 2021, you can review your 2020 Form 5498 or FMV statement if you had a December 31, 2020 account balance. You can find your Betterment tax statements here. Adjust your last 401(k) contributions to max out for the year. IRAs are great savings vehicles, but your 401(k) can be an even more powerful tool in enhancing retirement security as 401(k) plans have substantially higher contribution limits. For 2021, the 401(k) contribution limit is $19,500 with a catch up contribution limit of an additional $6,500 for individuals age 50 and up. These limits apply on a combined basis for the Traditional and Roth 401(k). Consider seizing on the opportunity to maximize these contributions by increasing your 401(k) payroll percentage today. You may need to speak to your payroll department to make the change. If your company’s 401(k) is managed by Betterment, max out your 401(k) here. Review withholding for remaining 2021 paychecks. Taxpayers have to meet certain withholding requirements to avoid paying a penalty for underpaying on taxes during the year. You may want to consider doing a tax projection for all of your income and withholding for 2021 before the year ends. You can check yourself using the IRS’ official withholdings calculator. If you are not expecting to meet the safe harbor requirements, you may want to increase your withholding at your job by adjusting your W-4 election for your remaining 2021 paychecks. Convert your Traditional IRA into a Roth IRA in 2021. Did you know there is no income limit for converting a traditional IRA into a Roth IRA? 2021 might be the year to do it. While it’s not the right choice for every person, you may have one of these compelling reasons to do so: Capturing the benefit of tax rates that are lower due to 2017 tax legislation. Being in a lower bracket than normal due to retirement or low income year. Gaining the benefits of tax-free income in retirement or for a beneficiary. Capture the benefit of an unused AMT (alternative minimum tax) credit carryover. Capture the benefit of a NOL (net operating loss) carryover. The taxable portion of the conversion may be lower due to after-tax contributions made previously. Remember, Roth conversions are permanent, so you should be certain about the decision before making a change. You can discuss the complicated choice of making a Roth conversion in a retirement planning advice package with one of our licensed professionals. Think twice about selling a large taxable investment or making a big portfolio allocation change. The bull market for the last 10 years has left some investors with enviable gains on their investments. However, any substantial appreciation does come with significant tax risks upon a withdrawal or a significant rebalancing. Capital gains are realized and can increase your tax liability. Some investors may have losses to offset the gains while others may be forced to pay taxes currently. While Betterment’s tax-smart technology sells the most tax-efficient investments first on partial withdrawals, if you remove an entire balance, all of your gains will be taxable income. Before you pull the trigger on an investment sale, consider if you need your invested money now or if you can draw down a balance over time. Even spreading withdrawals over multiple tax years could be more advantageous in terms of taxes. Capture the benefit of 0% long-term gains tax rates. If you have an income below $40,400 (single) or $80,800 (married filing jointly) for the year, you may benefit from the 0% long term capital gains tax rate. This means that you can sell capital gains (held more than one year) for any amount less than the gap between your regular income and those limits without getting taxed by the IRS. However, you should know that using this tax advantage could impact other positive tax moves, like qualifying for the Retirement Savings Contribution Credit (which has similarly low income limits). Also, most state taxes will still tax your long-term gains. Additional rules apply, so this move may be one to talk over with a qualified tax professional.

How You Benefit Your Community By Investing Responsibly Betterment’s new Broad Impact Portfolio lets you invest in your community and the values you care about, while maintaining a diversified portfolio with low expenses. Most of the time, investing is talked about as an act of self-interest. “Earn more.” “Retire comfortably.” “Build your wealth.” But where does the money go? Those dividends and gains come from somewhere, don’t they? When you entrust your money to any bank or investment fund, it’s used to generate more value—either loaned out or invested in different companies, governments and other entities. The question for us as people who own those loans and investments is: Do those companies’ activities benefit our world and local communities or do they have a negative net impact? Investing responsibly is about steering cash to companies whose business practices are sustainable. Will you be giving your money to companies that extract profits from a community without benefiting society positively? Or, will you be fueling companies that have a positive social or environmental impact, that perhaps will help change our world for the better? We all know of companies we respect. Whether it’s the small construction firm that has grown with the small city it helped to build, or the Silicon Valley tech company that’s changing how we grow fruits and vegetables sustainably, socially responsible investing is about choosing these kinds of companies on a broader scale. How do you know companies are having a positive net impact? What’s challenging about building a sustainable investment portfolio is the reality that a large company’s impact on society is multi-faceted. One company may have excellent management, prioritizing diversity and giving back to their community, but whose operations still harm the environment. Another might be carbon neutral but has a poor record when it comes to how it treats its workers. That’s where targeting a broad impact can be a strong, balanced approach to socially responsible investing. Rather than prioritizing any one value over another, Betterment’s Broad Impact portfolio assembles funds with an ESG mandate (environmental, social, and governance) which equally weighs a company’s profile along all three pillars of ESG, and tilts towards companies with the best overall scores in each sector. We aim for the investments in your Broad Impact portfolio to represent the companies that have a broad positive impact across the global market. Cool, right? Having a broad impact is a way of accounting for the pros and cons of many different companies and making a balanced choice, while maintaining a diversified portfolio with low expenses. Start with the Broad Impact Portfolio to help grow your money responsibly. Regardless of how you choose to invest, Betterment aims to help you align your money with your values. That means not only offering a socially responsible investing portfolio, but also helping you identify your goals and invest for them appropriately. Learn more about our guidance and get started saving for your future. Higher bond allocations in your portfolio decreases the percentage attributable to socially responsible ETFs.

Why Exercising Your Power As An Investor Can Impact Climate Change Betterment’s new Climate Impact Portfolio lets you support areas of the economy that are working to mitigate climate change, while maintaining a diversified portfolio with low expenses. Climate change is arguably the paramount problem of our time. It can be overwhelming to think about how we, as individuals, can contribute to a solution beyond going to the polls. The reality is that we don’t have to rely solely on political figures to influence change: by being intentional about where we place our money, we collectively have a lot more power than we think. The purpose of climate-aware investing is to support areas of the economy that are working to mitigate climate change. That includes investing in companies with low carbon footprints, relative to their peers, and investing in global green bonds, which fund projects that advance alternative energy, energy efficiency, pollution prevention and control, sustainable water, green building, and climate adaptation. How Climate Investing Makes An Impact A financial plan with high investing fees and an undiversified portfolio isn’t a plan worth settling for. Nor is a plan that doesn’t align with your ideals. Today, the movement to combat climate change is no longer limited to public protests and petitions. Sustainable investing is a grassroots effort, driven by consumers who are steering support away from companies that aren’t part of the solution, in favor of ones that do. As more and more choose to invest this way, the collective effort can help accelerate the transition to a clean energy economy—not just in the U.S.—but worldwide. Here’s how: What does climate impact look like? Try reduced emissions and reliance on fossil fuels. Climate impact looks like offering more climate-aware alternatives. We know that increased carbon emissions caused by human activity directly contribute to global warming. Compared to the 100% stock Betterment Core portfolio, carbon emissions per dollar of revenue in the 100% stock Climate Impact portfolio are reduced by half. That means that our investment into portfolios with a climate focus helps grow companies committed to a low carbon economy, which can influence other companies to follow suit. By investing in the Climate Impact portfolio, you are actively divesting from some of the companies most reliant on fossil fuel, while actively favoring those who are best at cutting their carbon emissions. That’s why we at Betterment are building a future where investors don’t have to choose between their values and their performance goals of globally diversified market returns. Now, they can have both. Start with the Climate Impact Portfolio to help grow your money responsibly. Regardless of how you choose to invest, Betterment aims to help you align your money with your values. That means not only offering a socially responsible investing portfolio, but also helping you identify your goals and invest for them appropriately. Learn more about our guidance and get started saving for your future. Higher bond allocations in your portfolio decreases the percentage attributable to socially responsible ETFs.

How Investing In Gender and Racial Equity Is A Step Towards Social Change Betterment’s new Social Impact Portfolio lets you support companies who promote gender and racial equity, while maintaining a diversified portfolio with low expenses. When Breonna Taylor and George Floyd were murdered earlier this year, the U.S. entered a period of mourning and social reckoning not felt since the murder of Michael Brown and subsequent rise of the Black Lives Matter movement in 2014. Amidst the clamor for justice and accountability, there arose another distinct call-to-action for corporations to invest more in their Black and brown employees, to call out racism and discrimination, and commit funds to organizations working for social justice. Here at Betterment, we quickly realized that our highest impact action might be to allow investors to use their dollars to effect change. Investing in companies that care about equality, made easy. In light of this, we asked ourselves how we could create a new portfolio with equality for women and Black and brown Americans at the heart of its mandate, while also staying true to our fiduciary duty of low costs and global diversification. We found the answer by augmenting our Broad Impact portfolio to include two additional funds: Impact Shares' NAACP Minority Empowerment ETF (NACP) and State Street Global Advisors' Gender Diversity Index ETF (SHE). NACP allocates money towards companies that rank highly on their diversity policies and on how they engage with communities of color. SHE selects companies who lead their peers in terms of women in senior leadership positions. These two funds, alongside the other funds with an ESG mandate in our Broad Impact portfolio (applying Environmental, Social, and Governance scoring criteria), now make up Betterment’s new Social Impact portfolio. Sounds great, right? Wrong. Because believe it or not, these two ETFs are some of the only ones of their kind. In fact, the NACP fund is the only ETF of its kind. How can investing in these funds lead to gender and racial progress with such a limited sphere of influence? Using capital to influence positive social outcomes is vital to our democracy. Part of the answer to change lies in our collective, continued contribution, which can grow the relative power these leading companies have over time. By investing in NACP, investors are putting more of their money in companies with a proven track record of minority empowerment and diversity policies. By investing in SHE, investors are placing more of their money in companies that have demonstrated more of a commitment to gender diversity within senior leadership than other firms in their sector. As Betterment’s SVP of Operations & Legal Counsel, Boris Khentov says, we can “work to erase the gap by incorporating this focus into our investment strategy now. As our dollars flow into the funds, they’ll get bigger. This raises awareness of the funds, while driving down costs thanks to economies of scale, which will bring along even more investors.” Now more than ever—when the number of female CEOs has actually decreased over time and when there are only three Black Fortune 500 CEOs—we need to send a signal that there is demand for a variety of lower cost funds that focus on social equity, so that investors can increase their impact along the values that matter most to them. Ultimately, this is an aspirational portfolio. In the same way we want to see change in the world, change that will take time, the Social Impact Portfolio is a step towards aligning ourselves to that ultimate goal, and that of our customers. Start with the Social Impact Portfolio to help grow your money responsibly. Regardless of how you choose to invest, Betterment aims to help you align your money with your values. That means not only offering a socially responsible investing portfolio, but also helping you identify your goals and invest for them appropriately. Learn more about our guidance and get started saving for your future. Higher bond allocations in your portfolio decreases the percentage attributable to socially responsible ETFs.

Funding a Safety Net: Calculate Your Target Amount Don’t know how much to set aside for emergencies? Don’t let uncertainty stop you from saving. We’ll help you figure out how much you should save so that you can feel more prepared. How much do you actually need to set aside for emergencies? No one can predict the exact timing or cost of future emergencies any of us will face. However, we’ll provide recommendations to help you be as prepared as possible, based on what we know about you. How much do you need? Calculating how much you’ll likely need in your Safety Net might seem difficult. Luckily, we can help. We’ll recommend a target savings amount for you when you set up your Safety Net goal in your account, based on the formula below. You can also use this formula on your own to determine a target amount for your emergency funds. 1. Estimate your monthly expenses. Your expenses are the starting point of our calculation. Unfortunately, many individuals are unaware of their average monthly spending. That’s why we use research from the American Economic Association and the National Bureau of Economic Research to estimate your average monthly spending based on your gross income. The data shows that, on average, lower income households tend to spend a higher percentage of their income. As your income increases, both your taxes and savings will generally increase. Even though you will now likely spend a higher dollar amount, that amount represents a smaller percentage of your overall income. The graph below shows how the percentage of your spending generally decreases as your income increases. Data: Betterment analysis of self-reported income and estimated tax rates; American Economic Association; National Bureau of Economic Research. The chart shows assumed rates of spending, savings, and effective taxes for a single individual with no additional information about location, actual savings, or Social Security benefits. The default location is Colorado, which is roughly equivalent to the U.S. national average for cost of living and state taxes. Knowing this information, we can easily estimate your monthly expenses as a percentage of your income. For example, if your gross income is $100,000, we can estimate that your expenses will be about $55,000 per year, or in other words, $4,600 per month. 2. Decide how many months you want to cover. Once we estimate how much money you spend per month, the next question is—how many months of expenses should your emergency fund be able to cover? One of the reasons to build a Safety Net is to prepare for the chance that you may unexpectedly lose your job. We looked at data from the United States Bureau of Labor Statistics, which shows that the median duration of unemployment is about three months. This is why we recommend that you save enough to cover expenses for at least three months. Continuing our above example, $4,600 of monthly expenses x three months = $13,800. Of course, there are other potential uses for your Safety Net aside from just losing your job—such as medical bills, auto repairs, etc.—but this provides us with a reasonable baseline number. 3. Last but not least—add a buffer. The third and final step in our Safety Net formula is adding a buffer for market downturn protection. Rather than holding on to cash, we believe you should invest your Safety Net in a low-risk, globally-diversified portfolio of 30% stocks and 70% bonds. The reason behind this is that holding too much cash usually means your money isn’t working as hard for you as it could be. And because the national average interest rate for savings accounts is only 0.04%, holding too much cash could mean you’re actually losing money because of inflation, which generally can be around 2% per year. Investing always comes with risk, and that means your Safety Net could fluctuate up and down in value. To account for this known fact, we recommend that you add a buffer to the target amount you’re trying to reach in your Safety Net. Our recommended buffer amount is 30% above your original target amount. Continuing the same example from above, if three months of expenses = $13,800, then you would take $13,800 x 130%, which would give you a final target amount of $17,940 for your Safety Net. Reasons to Adjust Your Safety Net Target Amount For many customers, the above formula is more than detailed enough to meet their needs. However, we allow you to adjust your Safety Net target amount, if you choose to do so. Below are a few reasons for why you may consider adjusting our default Safety Net target amount recommendation. You don’t want to invest your Safety Net. Some investors may not be comfortable with our advice to invest emergency funds. Instead, you may prefer to keep your Safety Net in cash, or a savings account alternative like Betterment’s cash account, Cash Reserve. Choosing to keep your Safety Net in cash or in Cash Reserve may reduce the need for the 30% buffer amount we discussed earlier, but remember that it might also mean lower expected returns over the long run. Whether you choose to invest your emergency funds or keep them in cash is up to you. The most important thing is that you are working towards having any type of emergency savings at all. Your income isn’t stable. Our default calculation uses three months of expenses because that’s the average length of unemployment in the U.S. However, sometimes you may need to dip into your emergency fund, even if you haven’t lost your job. If your income varies and isn’t the same from month to month, it’s possible that even though you’re still employed, you need to use your emergency savings due to a rough month or two. This may be the case for those who work in sales or another commission-based type of job. An unsteady income stream may cause you to tap into your Safety Net more often than someone who is a salaried employee with paychecks that occur regularly. This can be particularly tough if a few bad months occur close together, before you have time to refill your Safety Net. This is why, if your income is unstable, you may want to increase your Safety Net to cover 5 or 6 months worth of expenses. You are the sole/primary income earner. If you are the sole breadwinner in your family, losing your job could be catastrophic to your family’s finances. The loss of your job could mean that your family has no income at all. Compare this scenario to that of a family where both spouses work and earn similar salaries. If one of them loses their job, it would be tough, but at least they have another source of income to help weather the storm until the unemployed spouse finds another job. If your family only has one income earner, you should consider having a slightly larger Safety Net. Your expenses may not be adjustable. If you had a large medical bill or necessary car repair, would you be able to cut back on your expenses temporarily? If a large portion of your monthly spending is discretionary, this might be fairly easy for you to do. Maybe you won’t go out to eat for the next couple of weekends, or you delay that vacation you were planning. It wouldn’t be fun, but you could get by. If this sounds like the case, maybe instead of saving for three months of total monthly expenses, you could consider saving up only enough for three months of your fixed and unavoidable expenses, such as utilities and rent. However, if the majority of your monthly expenses are fixed, you won’t have this option. You can’t temporarily cut back on student loan payments, rent, or utilities. If these unavoidable expenses make up most of your spending, you may need a larger Safety Net. Your personal risk tolerance varies. Lastly, don’t forget your personal risk tolerance. Some customers are comfortable with 1-2 months of expenses in their Safety Net, and others can’t sleep without having a full 12 months worth of expenses tucked away. To each their own. While we caution against going too small with your Safety Net, ultimately the decision is yours and comes down to how you prioritize your financial goals. Let’s get prepared. Having emergency savings is a critical component for your financial health. We help make it easy by estimating how much you should have in your Safety Net, so you don’t have to. Since there are reasons why you may need more or less emergency savings, you can adjust your target to better match your individual needs. One last piece of advice: Make sure you only use your Safety Net for true emergencies. Try not to dip into it unless absolutely necessary.

How Betterment’s Climate Impact Portfolio Was Born At Betterment, our work is just beginning. Our Climate Impact portfolio is as much a process as it is a product. We see it as a continuation of a conversation with our customers, who told us in no uncertain terms, that climate change matters to them. If climate change somehow wasn’t already front and center of your headspace, 2019 likely changed that. In February, Rep. Alexandria Ocasio-Cortez and Sen. Markey released their Green New Deal resolution. By August, the Amazon rainforest, often referred to as the “Earth’s lungs”, was on fire, as climate activist Greta Thunberg sailed across the Atlantic in a carbon-neutral, solar-powered yacht. In New York, she’d address the United Nations, and go on to be named Time’s youngest ever Person of the Year for sounding “a moral clarion call to those who are willing to act.” Later that fall, inspired by Thunberg, actress Jane Fonda partnered with Greenpeace to kick off “Fire Drill Fridays”, a series of weekly protests through Washington D.C. The final week’s theme was “The Role of Financial Institutions in the Climate Crisis”. Dr. Ayana Elizabeth Johnson, a marine biologist and a friend, extended an invitation to join her at this protest. I never thought of myself as an activist, but I had spent the better part of a decade helping to build a different kind of financial institution at Betterment. I knew this was an opportunity I couldn’t miss and soon found myself aboard an Amtrak headed to D.C. Curbing greenhouse gas emissions from human activity must center on dramatically reducing reliance on fossil fuels across every sector of the global economy. No surprise then, that the rallying cry that weekend was cutting off the flow of capital to the fossil fuel industry. One word reverberated across every speech and conversation: “divestment.” As we marched together towards the Capitol, one phrase ran through my mind: “if only it were that simple.” What did feel simple, however, was that those of us pushing for change within the financial services industry hadn’t come close to channeling the remarkable energy on display. In our goal to bring more American investors off the sidelines and into sustainable investing, we were clearly falling short. Since 2017, Betterment has offered one “Socially Responsible Investing” option, constructed from funds that tilt towards companies which rate highly on a scale that considers each of three pillars: Environmental, Social and Governance (“ESG”). ESG is often embraced as the gold standard for sustainable investing by professionals, but is not tailored to a specific investor’s values. In that moment, seeing the power and conviction of thousands who were mobilized by climate change, our sole ESG offering no longer felt like enough. The Betterment Way Back in NYC at Betterment’s headquarters, it was becoming clear that adding a climate-specific portfolio would better reflect some of our customers’ values even more than our broadly-focused offering could alone. If so, greater adoption would further amplify the signal to the industry that values-based investing, despite its recent growth, was still underserved. For over a decade, Betterment has been working to maximize our customers’ expected returns following the principles of global diversification and low cost. We’ve sought to tackle the complexities behind implementing a sophisticated investing strategy, so that our customers don’t have to, while maintaining transparency around the choices that go into our products. We applied this framework to the challenges of integrating our customers’ values into their investments. We felt well-positioned to make this daunting process simpler, wherever we could. Where some amount of complexity was unavoidable, we would be transparent about how we chose to address it. Broadly speaking, there are three distinct approaches to climate-conscious investing, and all three are integrated into Betterment’s Climate Impact portfolio. Divestment (i.e. excluding companies holding fossil fuel reserves) The equities basket includes SPYX, EEMX, and EFAX, “Fossil Fuel Reserves Free” ETFs tracking US, Developed, and Emerging markets. Low carbon exposure (i.e. overweighting carbon footprint leaders within each industry) The equities basket includes CRBN, a global ETF whose objective is to reduce the carbon footprint of a globally diversified portfolio. Impact (i.e. financing environmentally beneficial activities directly) The fixed income basket includes BGRN, holding “green bonds”, which fund projects across the world, including alternative energy, pollution control, and climate adaptation. The nuances behind how these approaches interact with each other is discussed below. Beyond Divestment What exactly was I going on about, muttering “It’s not that simple”, while surrounded by passionate cries to “divest” from fossil fuels? Like a good student of finance, I was referring back to another mantra: “Capital naturally wants to flow toward where it earns the highest return.” A core argument for divestment is that it “increases the cost of capital”. Less demand for a stock means a lower stock price, which means the company needs to give away more of itself to raise the same amount of money. The problem is that the more successful you are at driving up a company’s cost of capital, the higher the expected return for the financier.  As long as the business you want to starve is engaged in activity that remains both profitable and legal, another investor will come along.  The fewer investors are willing, the more those who remain willing stand to make. The alternative to divestment is engagement. By owning a stock, and using your rights to vote on shareholder resolutions, you can attempt to change the company’s activities from the inside. This path is long and messy. What seems like a victory, often curdles into an empty gesture, as management’s words produce no meaningful action. It’s a grind, and success is far from assured. Engagement is rife with compromise and disappointment. Divestment, on the other hand, feels principled and decisive. It offers immediate action in the face of a crisis that feels unstoppable. Yet its economic impact on the perpetrators of harm is negligible, particularly if it’s applied in a vacuum. Both strategies have their advocates, whose vigorous debates occasionally lose sight of the fact that they are on the same team. Moreover, conflicting appeals to absolutes run the risk of paralyzing millions of their fellow citizens, deeply sympathetic to the cause, but reluctant to wade into the confusion. Can the two approaches be meaningfully reconciled? Michael O’Leary and Warren Valdmanis offer a compelling argument that they can. In their recent book, Accountable: The Rise of Citizen Capitalism, they consider the question through the lens of the Divest Harvard campaign, which took center stage on campus in the spring of 2019. While O’Leary and Valdmanis believe in the effectiveness of engagement, they express great admiration for the campaign’s leaders, which include both students and faculty. By directly examining these leaders’ expressed views, O’Leary and Valdmanis conclude the following: Divestment advocates have done the climate movement a great service, by forcing a broad recognition that “there is no value-neutral way to invest”. These leaders aren’t naive. They view engagement with suspicion—as a fig leaf for complacency. But they also understand the limits of divestment within our existing legal and financial framework. Rather than narrowly fixate on proximate effects, these leaders take a longer view of divestment—as a political act of civic leadership. Under this theory, divestment seeks to impose “a cultural toll, labeling oil and gas companies as morally repugnant … making it easier to pass bold legislation rapidly, with broad political support.” Accordingly, the measure of success for divestment should not anchor on the number of dollars diverted, but on its ability to “center climate change in broader discourse”. Furthermore, if you are able to advance that objective, while also pushing for change via engagement, there is no reason why pursuing both in parallel cannot be a coherent strategy. In other words, if an act of divestment, however great or small, aims to achieve more than a feeling of moral satisfaction, it needs to be heard. It needs to help start conversations, trigger chain reactions, grab headlines. And it doesn’t preclude pushing for change within the shareholder framework, if integrated thoughtfully. It’s a lot to ask of your investment account. Here’s how we approached it at Betterment. Divestment And Engagement In Your Climate Impact Portfolio A divestment strategy is implemented in a globally diversified portfolio by applying a screen to an index of all available stocks, expunging those that hold large fossil fuel reserves, and producing a so-called “ex Fossil Fuels” index. The problem with relying solely on an “ex Fossil Fuels” approach, is that it is both under-inclusive, and over-inclusive. First, let’s look at how it is under-inclusive: An “ex Fossil Fuels” index is highly effective at screening out stocks of companies with familiar logos that we’ve seen plastered on gas stations. But, such indexes generally do not exclude the hundreds of companies that don’t necessarily own reserves, but are integral to the fossil fuel industry (e.g. pipeline operators, and the utilities that actually burn the fuels). Critics of a divestment-only approach refer to this phenomenon as “greenwashing”. There are powerful incentives for investment managers to expunge the familiar fossil fuel companies and call it a day. This goes a long way towards providing an investor with emotional satisfaction, but it ignores the complex enmeshment of fossil fuels throughout every sector of the economy. As for how it is over-inclusive: A handful of energy companies have staked their futures on renewable energy, and are actively diversifying away from fossil fuels. However, these transitions take time and today they qualify for exclusion under a blunt divestment criteria. We believe there is merit to the divestment approach. In Betterment’s Climate Impact portfolio, 50% of the stock basket is allocated to SPYX, EEMX, and EFAX, “Fossil Fuel Reserves Free” equity funds for US, Developed, and Emerging markets. For an act of divestment to be effective, it must be heard, and for most investors, this is uniquely possible by joining with other like-minded investors through index funds. For “ex-Fossil Fuels” funds to grow in assets and stature, sends an increasingly loud message, that the public views the industry as a whole as a pariah. We also believe there is merit for the engagement approach. In Betterment’s Climate Impact portfolio, 50% of the stock basket is allocated to CRBN, a global ETF whose objective is to reduce the carbon footprint of a globally diversified portfolio, with an expense ratio of only 0.20%. CRBN was launched on Earth Day, 2015, seeded with an initial investment from the United Nations Joint Staff Pension Fund. Today, it holds nearly $650mm, and is gaining scale rapidly. By excluding companies holding fossil fuel reserves, ex-Fossil Fuel indexes are effectively concerned only with future, not ongoing emissions. CRBN takes aim at both, with more precision, by assigning every company in every sector a “carbon exposure” score, which incorporates any fossil fuel reserve holdings, but also greenhouse gas emissions from the company’s activities (measured per dollar of revenue). It then uses the scores to minimize carbon exposure across the entire index while maintaining tracking error constraints, by overweighting companies that are managing the lowest carbon footprint within their sphere of activity, including in the energy sector, and underweighting companies that lag their peers, with some of the worst offenders getting dropped from the index entirely. Boosting The Leaders Not surprisingly, a rigorous, quantitative methodology is highly effective in service of a clear objective. When compared to the equity basket of Betterment’s core portfolio, CRBN achieves a 50% reduction in carbon emissions. Perhaps more surprising, is that CRBN’s holdings also emit less carbon than the companies collectively held by the “ex-Fossil Fuels” funds, in spite of the latter’s targeted exclusions. CRBN achieves these results by mathematically expressing preference for “best-in-class” leaders in every sector. In practice, this means that CRBN adds back a handful of energy companies which were screened out by one of the three “ex-Fossil Fuels” funds. An energy company can wind up in the index if it’s shifting out of legacy fossil fuel activities, and driving significant investments in renewables or bio fuels. A couple of illustrative examples held by CRBN as of 1/31/21: Neste is the largest producer of renewable diesel jet fuel, which will significantly reduce aviation emissions (it has two renewable refineries but also two conventional refineries). NextEra Energy Inc is the world’s largest producer of wind and solar energy (but also has generating plants powered by natural gas, nuclear energy, and oil) Generally, “best-in-class” energy leaders are companies where pro-transition management factions have won the internal battles, and have successfully pivoted their roadmaps towards a net zero economy. But such strategic shifts can be fragile. Consider NRG, an enormous American power company, whose CEO, David Crane, wrote to shareholders in 2014: “The day is coming when our children sit us down in our dotage, look us straight in the eye … and whisper to us, ‘You knew … and you didn’t do anything about it. Why?’” NRG announced it would cut its carbon dioxide emissions by 50 percent by 2030 and 90 percent by 2050, and began its transformation. But just three years later, Elliot Management, an activist hedge fund unhappy with its financial performance, was able to reshuffle the board, depose the CEO, and begin to sell off NRG’s renewable energy assets. One could argue that the climate movement is better served, if the David Cranes of the world not only get control, but stay in control. Elliot was able to reverse the transition while holding just 6.9% of NRG’s shares. If climate-conscious capital held enough of the rest, and used that perch to fight, Crane could have survived. At a systemic level, divestment and engagement are complementary—the stick for companies core to the problem, and the carrot for those who may be part of the solution. Each message has value, and your investments can express both. However, for these messages to actually reach their intended recipients, how you implement these investing strategies becomes important. A globally diversified portfolio calls for exposure to thousands of individual stocks and bonds. Buying index funds, rather than the individual securities directly, is not only a cheaper and simpler way to get this exposure. For most climate-conscious individual investors, it’s also by far the most effective path to have their dollars contribute to the systemic change they want to see. A detour into some general investing plumbing may help to appreciate why. The Power of the Index While passive investing had been steadily gaining popularity over active stock-picking for decades, the 2008 global financial crisis served as an inflection point. Complex strategies seeking to beat the market came under suspicion, and then continued to lose credibility during the relentless bull market that followed. With each year, a transparent buy-and-hold strategy proved harder and harder to beat, particularly net of fees. The spotlight shifted away from chasing alpha, towards lowering expenses, making the continuing rise of passive index fund investing a textbook flywheel in action, where growth begets more growth. Falling fees mean more inflows, and more assets mean more scale, which allows for another round of fee reductions, which pulls the next cohort of fee-conscious investors into the fold. The big fund managers have been engaged in a decade-long “core war”, led by Vanguard, whose flagship equity fund (found in Betterment’s core offering), has ballooned to over a trillion in assets, with its expense ratio down to 0.03%. These pooling dynamics have had an underappreciated second order effect—the anointment of index providers to new heights of authority in global markets. The trillions may be flowing into Vanguard, Blackrock, and State Street, but the investing decisions have been largely delegated to FTSE Russell, MSCI, and S&P DJI. In 2017, the Economist dubbed them “finance’s new kingmakers: arbiters of how investors should allocate their money.” However laborious the process behind constructing and maintaining an index, the finished product is little more than a list of companies, with assigned percentages that add up to 100%. The index-makers take pains to emphasize the rules-based, non-discretionary nature of their work. Nonetheless, because trillions of obedient dollars promptly and faithfully replicate every bureaucratic tweak, these glorified spreadsheets are imbued with at times eye-popping power. Being added to a list has no bearing on a company’s business, and under an efficient markets hypothesis, should have no impact on share price. Yet it is conventional wisdom that membership in the S&P 500 provides some price support. Thus, joining this iconic club can be cause for fanfare befitting a coronation, while removal can be tantamount to a “humiliation”, a symbol of irreversible decline. Some allegedly “rules-based” decisions are inevitably discretionary, and impactful enough to threaten a geopolitical crisis. A rumor that MSCI was considering reassigning Peru from its flagship Emerging Markets Index, to its less prestigious Frontier Markets Index, put the finance minister, leading a senior delegation, on an emergency flight to NYC to avert the demotion. The gradual inclusion of Chinese “A-shares” into the major indexes was a highly political, contentious process with far greater stakes. In early 2019, MSCI announced it would quadruple its exposure, which is estimated to steer $80 billion of investment into China. Throughout the process, MSCI has at times functioned as a quasi-regulator, at one point delisting several Chinese companies that had violated its internal governance standards. Such examples are myriad, ably outlined in a recent paper on “the growing private authority” of index providers. It’s hard not to come away in agreement with the authors, that this backoffice corner of global finance would benefit from more transparency and accountability. But there’s another takeaway: These mechanical, ostensibly value-neutral switchboards for capital have untapped potential as agents of change. But Make It Sustainable 🚀 What would it mean for sustainability-focused indexes to wield this kind of power? Is it crazy to imagine a future in which getting booted from a major ESG index for failing to hit sustainability targets is viewed as irrefutable evidence of corporate management malpractice? Or is that future more likely than not, if we observe the patterns already in motion, some new, some familiar, and play them forward to their logical conclusion? As of Sept. 2020, the top ten equity indexes were directly tracked by over $3.5 trillion. Of course, there is no hint of ESG anywhere near the top, but there are compelling reasons to believe that a secular shift is already in progress, and that the rate of change will be non-linear. None other than the head of ESG at MSCI believes that its sustainable indexes will eventually overtake its traditional offerings, and that trends suggest that the shift will happen “more quickly than most people would expect.” Indeed, while the absolute numbers are relatively small, sustainable funds are seeing scorching, exponential growth. In 2020, investors poured in $50 billion; double that of 2019, and ten times that of 2018. Meanwhile, we’re on the cusp of the greatest generational transfer of wealth in history, to a demographic that bodes well for only more acceleration. According to Morgan Stanley, “nearly 95% of millennials are interested in sustainable investing, while 75% believe that their investment decisions could impact climate change policy.” This story is genuinely new, but one level deeper is a more familiar one. Sustainable investing, until recently still largely the domain of active management, is catching up with the broader industry, and shifting towards passive. 2020 marked the first year that passive sustainable funds (i.e. ones that fully replicate an ESG index) handily beat active sustainable funds. Passive took in 2.5 times more inflows than active, whereas the split was 50/50 just in 2019. Not surprisingly, ETFs, predominantly passive, and favored by investors for their tax efficiency, dominated mutual funds by similar margins. In other words, the defining capital allocation shift of the last two decades is just now starting to play out within the nascent field of sustainable investing, and we know where it leads—the elevation of the index as a behind-the-scenes nexus of power. Neither retail nor institutional investors are likely to reverse course towards more complexity, less transparency, and higher fees. Sustainable or not, investors have been trained to be laser-focused on low fees. We know how the flywheel turns. How do we harness this unstoppable force as a tailwind for real progress on sustainability, and ensure that there’s more to this reallocation than greenwashing deck chairs on the Titanic? “Index Activism”: A Theory Of Change “Index activism”, as any theory of change, faces serious challenges, addressed below. But the structure of index fund investing, as compared to investing in companies’ stocks directly, is uniquely suited to aggregate and amplify the impact of tens of millions of individual portfolios. It represents a form of “collective bargaining”—putting aside lesser differences in favor of progress towards a greater common cause. Index funds will always entail a trade-off between personalization and the benefits of scale. For some investors, trading the underlying securities for a portion of their overall exposure, will make more sense. However, when it comes to effecting broad, systemic change, the prospect of a robust sustainable index fund ecosystem is hard to beat. We can rely on the asset gathering flywheel to carry funds tracking sustainable indexes to the mainstream. Yet asset inflows alone won’t magically teach the passive asset allocators to be the active shareholders that we need them to be. After all, active ownership is a demanding full time affair, requiring specialized expertise. Most of us already have jobs, and ideally, we would empower a team of experts with our dollars, not only to decide what shares to buy, but also how to then leverage those shares in furtherance of a sustainable agenda. What might it look like, if fund managers acted as stewards of sustainable business, pushing their portfolio companies towards a net-zero economy, standing ready to oppose activist shareholders like Elliot, who seek to undermine progress? Boutique managers who have long specialized in shareholder advocacy can offer a glimpse. In 2020, Green Century, which manages ~$1 billion across three mutual funds, used the shares of Procter & Gamble it holds on behalf of investors to introduce a resolution, calling on the company to step up efforts to mitigate deforestation in its supply chain. P&G’s board recommended that shareholders vote “Against”. It passed anyway, with a resounding 67% of votes cast—the first ever deforestation proposal to do so, receiving twice as many votes as any such prior attempt in all of corporate America. Experts believe it will spur other companies targeted with deforestation resolutions in coming months to engage with shareholder proponents. The Work Ahead Now for the reality check—both Blackrock, with 43% of all passively managed sustainable assets, and Vanguard, with 21%, could learn a thing or two from tiny Green Century, to put it mildly. When it comes to steering capital flow, where their expertise is unparalleled, the giants’ commitment to sustainability is tangible. In January 2020, Blackrock made its first ever addition of a sustainable fund, its flagship ESGU, to forty of its non-ESG model portfolios. As a result, ESGU captured nearly a quarter of the $26 billion of net new money that surged into sustainable strategies through August 2020. Yet, there is no denying that active engagement is not in their DNA. That Larry Fink, the head of Blackrock, would call for every corporation to develop a plan for a net zero economy, as he did in his 2021 “Letter to CEOs”, would have been hard to believe just five years ago. Activists may see more posturing than substance to these proclamations, and the facts don’t exactly refute the accusation. While support for shareholder resolutions relevant to climate change from fund managers was generally on the rise in 2020, Blackrock and Vanguard, the perennial largest and second largest shareholder of any major U.S. corporation, were dead last, voting in favor of just 12% and 15% of such resolutions, respectively. Even basic issues of transparency reflect an unacceptable status quo. For instance, how did these giants, who together control about 15% of Procter & Gamble, vote on Green Century’s deforestation resolution? For now, only they know. Blackrock only recently began to disclose their votes on a quarterly basis, and Vanguard may not announce its votes until August 2021. Reading Fink’s letter in a vacuum, one could get the impression that Blackrock confidently leads on environmental and social issues, and corporations are somewhat compelled to actually listen. At best, that model “is not so much true, as it is in the process of becoming true”, as Matt Levine generously put it. As investors, and as citizens, we can and should demand that managers of sustainable funds act like sustainable fund managers. However, one need not infer bad faith. It’s hard to overstate the banal power of inertia. An active posture towards their portfolio companies runs directly counter to decades of institutional muscle memory. Reorienting the highly coordinated efforts of tens of thousands of people will require its own theory of change. At Betterment too, our work is just beginning. Our Climate Impact offering is as much a process, as it is a product. We see it as a continuation of a conversation with our customers, who told us in no uncertain terms, that climate change matters to them. We set out to integrate this mandate alongside the rest: diversify globally, keep costs low, optimize for after-tax return, and automate as much as we can. It's the framework we've been refining for a decade, and continuing to make it better is all we know. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. Higher bond allocations in your portfolio decreases the percentage attributable to socially responsible ETFs.

How Disciplined Will You Be in the Next Downturn? Every investor should have a fire-drilled plan for the next market drop because anticipating your own behavior is part of what makes you a better investor. I can’t take any further losses. I’m just not comfortable with losing 8% of my money in one year. I’ll start thinking about more aggressive investments when the dust settles. The stock market is pretty rough right now. If that continues, I don’t want any part of it. I know I shouldn’t time the market, but it’s now up 3x and I can just see it reversing course soon! These are just a few paraphrased notes from Betterment customers who reduced their stock allocation in January or February 2016. From Nov. 1, 2015 to Feb. 11, 2016, the global stock market (ACWI) fell about 15%. And, of course, markets then rallied 31% up until September 2017. Looking back between February and September of 2017, a stay-the-course investor tracking the index would be up about 20% cumulatively. A reactive investor, who sold in February then re-bought when markets recovered in July, would be up only 4%. Source: Data from Xignite, total returns data for ACWI ETF representing global stock markets. This particular ETF was chosen as it is a widely used global market cap fund, and represents a commonly used investable market cap global stock portfolio. We published research showing that the more a customer changes their allocations, the worse their performance likely is. On average, investor returns dropped about 0.20% per year for each allocation change the customer made. This means if you change your allocation three times per year, you could underperform by about 0.60%. That’s more than twice the annual cost of Betterment’s advice and portfolio management. One study by Vanguard of 58,000 of their IRA account holders from 2008 to 2012 found that those who reacted to the crisis had significantly worse performance than those who stayed the course, giving up about 1% a year. When you consider that a reasonable excess rate of return for global stock markets is about 6%, that could mean giving up about 17% of your expected return. How can you ensure that you won’t succumb to the same fears and anxieties the next time a market drop hits? My recommendation has just three simple steps: Arrange your finances. Write out a downturn plan. Stick to it. Arrange your finances. Properly arranged finances make it much easier to glide through a rough market by buffering and hedging your overall downside exposure. Here are four major steps to help get your finances in order. 1. Have an emergency fund. An emergency fund is usually one of the highest priority goals we recommend customers have, and we believe it should be invested conservatively. A bond-heavy portfolio does a better job than cash at preserving the real value of your wealth. One reason it’s important to have an emergency fund is because it helps gives you peace of mind when longer term, higher risk portfolios are more affected by a market drop. If you need to make a withdrawal from your emergency fund, you’ll be able to access it since it’s invested conservatively and is less likely to experience an extreme loss than a fund invested in a more aggressive allocation. 2. Earmark your money for future expenditures. It’s also smart to earmark your money for future spending. At Betterment, we call this setting a goal. Setting up goals helps to make sure you have money when you need it, aligning our investing advice to your life needs. From existing research on goal-based wealth management and internal research on Betterment customers, I believe investors who use specific and highly personal goals could not only save more, but might also earn higher returns. 3. Don’t take on more risk than necessary given your time horizon. It’s easy to get excited when markets have gone up and increase your stock allocation to try and benefit from it. While it’s ok to deviate within a range, we generally don’t recommend going outside our recommended ranges. Our stock allocation advice is based on your goal type and how long you’re investing for. We take into account the total cumulative returns over that period and figure out an optimal amount of risk for you to take on. You generally shouldn’t take on significantly more risk than we recommend. It exposes you to drawdowns that your portfolio may not have time to recover from. 4. Don’t invest in a portfolio that might keep you up at night. Your emotional time horizon is likely much shorter than the goal term. That’s why, when setting your allocation, we show you a range of one-year performance you can expect from that portfolio. Have an honest chat with yourself about how much of a loss would be too much to bear. Imagine you had invested $100,000 a few years ago, and today you logged in to see your portfolio was down to $90,000, a -10% loss. Would that be too much? How about $70,000, a -30% loss? How about $44,000, a -56% loss? That’s how much a 90% Betterment portfolio lost in 2008-2009. For a 90% stock portfolio, up to a -27% drop over any one-year period wouldn’t be unusual, per the example below which reflects our 90% stock portfolio. You should choose a stock allocation that you could stay invested in, even during a down market. So if the “poor” market performance would be too painful for you, feel free to take on less risk. You’ll have to save a bit more, but you’ll be able to sleep at night. Write out your plan now. Prioritize your goals. In a market drop, most of your goals will likely experience a loss. That might mean shifting balances between them, or waiting longer to achieve some after the market rises again. Know ahead of time what goals you’ll prioritize and whether or not you’ll need to move money from lower priority goals to higher ones. Have an anti-monitoring strategy too. At some point, the stress of seeing losses increases the chance that you’ll do something impulsive. Rather than test your fortitude and willpower, give yourself a break from the stress. If the news is bad, you can always choose to not log into your account. I regularly use apps to restrict my access to unproductive websites at work. I recommend doing the same thing with your investments. What can you do during a market drop? Liquidate legacy losers. The most common barrier to consolidating your taxable investments is capital gains tax. Take advantage of a short-term market drawdown and let go of a high cost mutual fund or diversify away from a single stock position. What can you do today? Prepare a short list of investments you would like to liquidate, and the price at which you will give them the pink-slip. Our tax-switch calculator can also help with that. Do less than you want to. While the best investment strategy is typically to stay invested, some people could find the stress simply to be too much to bear. If you think you might make an extreme decision—such as moving to 100% bonds—if the drawdown continues, then it’s ok to reduce your risk temporarily. Adjust from 90% stocks to 60% stocks, for example, for a 60-day period. Make sure you set a reminder to revisit your portfolio at that point. While we don’t believe it will improve your performance from a ‘cold’ view, it may mean you’ll be less likely to make an emotional decision and have a higher return per nights lost in sleep. Take a vacation from your portfolio: My own research has shown that people are more likely to monitor portfolios during volatile periods. The only problem is that the more you monitor, the riskier your portfolio will seem to you. A better strategy is to login less during volatile periods—a strategy successful investors with higher emotions do follow. Sometimes, it pays to be the ostrich. Talk it out. Have a friend with a cool head? Sure you do. Contact us and our Customer Support Team can walk through your concerns with you. While Betterment is all about efficiency, we know there’s no replacement for a human conversation. And we love talking to you. Seriously. The figures contained in this article have been obtained from third party sources, and their accuracy and completeness are not guaranteed by Betterment. All performance data quoted represents past performance, and past performance is not indicative of future returns. The conclusions drawn in this article should not be construed as advice meeting the particular investment needs of any investor, and they are not intended to serve as the primary basis for financial planning or investment decisions. This material has been prepared for informational purposes only and is not a solicitation or an offer to buy any security or instrument.

What Are The Most Effective Deposit Settings? Choosing the right deposit strategy is an important step towards helping you reach your goals. We recommend setting up your auto-deposits so that they occur right after each paycheck. You’ve set up your account, prioritized your financial goals, and you’ve linked your checking account. Now you’re ready to start making deposits. Automating your deposits helps you to “pay yourself first” by quickly separating your savings money and spending money. It also reduces the amount of idle cash you hold, which could be earning more value if it was invested. More importantly, regular deposits help protect you from trying to attempt the impossible: effectively timing the market. Deposit Types There are multiple ways you can deposit into your Betterment account. You can make a one-time deposit or you can set up recurring deposits. One-Time Deposit A one-time deposit is an ad-hoc type of deposit where you choose a specific dollar amount to transfer from your checking account to any of your investment goals at Betterment. They can work well when you have cash on hand that you’re ready to invest, right now. A major downside of a one-time deposit is that you must initiate it manually. You’ll need to log in to your account every time you want to make a deposit. Even though we have a convenient mobile app for both iPhone and Android, we know you’re busy and likely have a lot on your to-do list already. Recurring Deposits Auto-deposits eliminate the manual process required for a one-time deposit, and instead, allows you to schedule recurring future deposits for a specific dollar value. The set amount will be transferred from your bank account on a repeating frequency that you designate—either weekly, every other week, monthly, or on two set dates per month, making it a great option for anyone who likes to know exactly how much will be transferred and when, on an ongoing basis. We’ll email you the day before a scheduled recurring deposit so that you can make any necessary adjustments before the money is withdrawn from your bank account. The email will provide you with an option to skip the auto-deposit if you need to. Many people utilize the auto-deposit feature as a way to dollar-cost average into the market. Auto-deposits help you stay on track and are the preferred deposit method for any of your goals. What are the most effective recurring deposit settings? The most behaviorally effective auto-deposit strategy is to set up your recurring deposits so that they occur right after each paycheck. Choosing the day after you get paid as your auto-deposit date allows time for your paycheck to completely settle in your bank account before we start the transfer to Betterment. The principle of having recurring deposits set up for right after you get paid is something you actually may already be doing in your employer-sponsored 401(k) account. Your 401(k) contributions come right out of your paycheck, and never actually reaches your bank account. With other investment accounts that aren’t provided to you by your employer, like IRAs or individual taxable accounts, it’s generally not possible to move money directly from your paycheck to those investment accounts. Instead, the next best thing you can do is to schedule auto-deposits for the day after your paycheck hits your bank account. Optimize Timing You may have heard of the saying “pay yourself first” when it comes to saving money. Setting up your auto-deposits for right after you get paid allows you to do this by separating your paycheck into two categories: savings and spending. From a behavior standpoint, this protects you from yourself. Your paycheck is immediately going towards your financial goals first, and any leftover cash in your checking account can then be used for your other spending needs. Avoid Idle Cash Delaying your deposits for any period of time after you get paid allows your cash to sit in your checking account—which can be problematic. Cash that sits in a traditional bank account is likely earning either no interest or very little interest at best. This means that over time, your cash is effectively losing value due to inflation. Letting the cash sit may also tempt you to try to time the market, which might lead you to ultimately hold on to your cash for even longer because of market activity. Not investing that cash could cause you to miss out on dividend payments or coupon income events that you otherwise would have received. Reduce Taxes Another perk of using auto-deposits is that they can help keep your tax bill low. Regular and frequent deposits and dividends help us rebalance your portfolio more tax-efficiently, which keeps you at the appropriate risk level without realizing unnecessary capital gains taxes. We do this by using the incoming cash to buy investments in asset classes that you might be underweight in, instead of selling investments in asset classes that you’re overweight in. Even little amounts help, because we can use those small amounts to invest in fractions of investments. How much should I deposit into each goal? Not sure how much you should be saving in each of your goals per month? We’ll tell you. You can see our recommendations on the Plan tab of each of your goals. We’ll calculate how much you should be saving towards each goal using information such as how much you already have saved, how long you’ll be saving for, and the expected growth rate of your investments. For more information on how our recommendations are determined, please see our goal projection and advice methodology. Ready to put your savings habits on auto-pilot? If you’re already a customer, setting up your preferred deposit type is easy. On a web browser, simply head to New Transfers and choose the deposit option. If you’re using the mobile app, simply log in and choose the Deposit button that will appear at the bottom of the screen. If you have any questions about how to schedule your auto-deposits, we have a team of customer experience associates available to help with any questions or concerns you may have.

The Origins of the Racial Wealth Gap Decades of voting, housing, job, and banking discrimination created a racial wealth gap in the U.S. One of the hallmarks of this country is an opportunity to become whatever you want to be. But if we look at the racial wealth gap, it unravels a historical narrative of unequal levels of opportunity that continue to impact us today. The Brookings Institute noted that “At $171,000, the net worth of a typical white family is nearly ten times greater than that of a Black family ($17,150) in 2016.” Mehrsa Baradaran, the author of The Color of Money, puts it best when she states, “The wealth gap is where historic injustice breeds present sufferings.” Looking at the racial wealth gap is like a cobweb. Each strand, or in this case, a reason for the racial wealth gap, can be overcome. But if you combine the strands—the reasons—it grows into a web. These strands are decades of voting, housing, job, and banking discrimination, to name a few, and years of this repeated pattern over generations creates a ripple effect that leads to racial wealth disparities today. A Case Study: How The U.S. Systematically Prevented Black Veterans From Military Benefits In World War II. Although there are many examples of how Black Americans were economically set back by the U.S., one tipping point in modern history is how lawmakers and business discrimination practices denied millions of WWII Black veterans access to GI bill benefits. The post WWII GI Bill benefits included low-cost mortgages, educational grants, and low-cost loans to start a business, which are all key wealth building and wealth transfer vehicles.    Ira Katznelson, author of “When Affirmative Action Was White,” said, “there’s no greater instrument for widening an already huge wealth racial gap in postwar America than the GI Bill.” Here are some examples of how Black veterans were negatively impacted during this time period: Housing discrimination left many Black veterans out of the suburban housing boom after WWII. In New York and northern New Jersey, there were about 67,000 post WWII GI Bill mortgages: non-white people made less than 100 of these mortgages. Black people, as well as other ethnic groups, were denied access to vocational training and college education. Even Black veterans who were lucky enough to get GI Bill education benefits faced Jim Crow laws that prevented many from going to college. No access to education benefits hampered many Black veterans from getting better paying jobs. Low paying jobs, combined with living in neighborhoods where schools had fewer resources, had its ripple effect. Their children, the baby boomer generation, were less prepared for college, and their parents couldn’t afford to send them to school. Today, the lack of inherited generational wealth also means that: Fewer Black Americans are investing. More Black Americans have high amounts of student loan debt. More Black Americans have credit card debt, most of which have crippling interest rates. While many of these issues require systemic changes to law, business, and legal practices, there are also tangible strategies Black Americans can adopt now to take charge of their finances. We delve into some of those in Betterment's annual look at Black wealth.

4 Reasons Why Women Need To Start Saving More And Sooner Women face unique financial challenges that make saving for retirement more urgent. When I first started in the 401(k) business and heard someone express the need for a special seminar on women and investing, I balked. Why do we need to talk about saving and investing to women differently than we do to men? As I quickly learned: the need to save for retirement is even more urgent for women because they face several undeniable headwinds. Gender Pay Gap1 For starters, most people are well aware of the gender pay gap, which currently translates into women earning just 82 cents to every man’s dollar. To put it mildly, improvements in this number over the years have been slow, and at the current rate of progress, estimates are that the gender pay gap will not close until 2093. And this number is for all women: for women of color and older women, the gap is even larger. Lower earnings over a working lifetime mean that women are more likely to have less saved for retirement. Longer life expectancies. In addition, the average life expectancy for women is about 81 years compared to 76 years for men.2 That’s five more long years that women have to support themselves in old age when a regular paycheck is no longer coming in.  And that’s just based on averages. One-third of women aged 65-years old today who are in excellent health will probably live to age 95—a full three decades past the traditional retirement age.3 So any money that women have saved for retirement needs to stretch further, in some cases much further. In some cases, this forces older women back into the workforce, often at low-paying jobs. Less time spent working. Compared to men, women often have less consistent income streams during their working years. As the primary caretaker in most families, women are more likely to interrupt their earning years to care for a loved one—whether a child, a parent, or someone else. Or they may elect to take a part-time job which not only reduces their income but often, too, their access to benefits, including a retirement plan. Lower participation in workplace savings plans. Women (and especially women of color) are more likely to work in part-time or other positions that don’t include retirement benefits.4 Even when they have access to a workplace retirement saving program, women are less likely to take full advantage of it. As part of recent study about retirement saving attitudes and behaviors among Millennials and Gen Z, Betterment found that overall, men are simply more engaged than women when it comes to retirement saving.5 Specifically with respect to workplace retirement plans like a 401k: Nearly twice as many women aren’t contributing to a retirement plan. Of those contributing, significantly more men increased their contributions in the last year—so they’re tending to their accounts. More men are maximizing the employer’s match. That means that ⅓ of women who have a match are leaving money on the table. Women’s Lower Participation In Workplace Savings Plans  Wow. That’s a lot of headwind! And that was even before the pandemic hit. As a result of COVID-19, women are more likely than their male counterparts to leave their paid positions to take care of school-age kids, which means the workplace is losing ground in terms of gender diversity.6 But the risks for women are even more personal: dropping out of the workforce means losing traction not only as it relates to career advancement, but also as it relates to financial security and building savings. And once again, women of color are impacted disproportionately: The pandemic impacted the very industries in which they are heavily represented, even while Hispanic and Black women are more likely to be single heads of households and the main source of financial support for their families.7 For all these reasons, women should start saving for their future—regardless of their age—before it’s too late. Younger generations can learn from older women: in one study, 41% of women across all races and ethnicities said that their biggest financial regret was not making the effort to invest more.8 Other research shows that women are 14% more likely to feel financially stressed than men and 13% less optimistic about their financial future.9 Women of all ages need to understand these challenges which may not be affecting them now, but likely will in the future. And if they’re already saving, then they (and everyone else!) should help spread the word. It’s never too soon to start saving for retirement. And Betterment can help. Whether you have your 401(k), IRA or other account with us, we can help you create a plan and determine how much to save, how to invest, and which accounts to use. And our automated tools and strategies will help to keep you on track.

How to Save for Retirement: 5 Essential Accounts to Consider If you are wondering where to squirrel away money when it comes to saving as tax-efficiently as possible, consider these five essential retirement account types. Saving for retirement can seem daunting and complicated, but it doesn’t have to be. If you are wondering where to squirrel away money when it comes to saving as tax-efficiently as possible, consider these five essential retirement account types. Traditional 401(k) The most common type of workplace retirement account for investors is a Traditional 401(k). Contributions to a Traditional 401(k) are made with pre-tax dollars, and the money is normally deducted directly from your paycheck before the paycheck reaches you. The result is that Traditional 401(k) contributions reduce your amount of taxable income for the current year. This holds true for Traditional 403(b)s, too. Money in a Traditional 401(k) grows tax-free, and the distributions are taxed when you withdraw the money during retirement. Therefore, it may be smart to contribute to a Traditional 401(k) if you think you will be in a lower tax bracket in retirement than you are currently in now. Another good reason to contribute to a Traditional 401(k) is the possibility of an employer match. Your employer may match the contributions you make to your Traditional 401(k) plan up to a certain percentage. That’s free money—and no one should pass that up. For 2020 and 2021, the contribution limits have increased to $19,500 for those under age 50. For those age 50+, the catchup contribution is now $6,500, meaning that your total contribution limit is up to $26,000. The IRS generally requires you to start taking required minimum distributions from your Traditional 401(k) either when you reach a certain age, or, when you retire from your job—if you are older than the age requirement. Roth 401(k) A less common but increasingly popular workplace retirement account is a Roth 401(k). These accounts have the same contribution limits as Traditional 401(k)s. The main difference is when the funds in Roth 401(k)s are actually taxed. Unlike Traditional 401(k)s, Roth 401(k)s are funded with contributions that have already been taxed. This means that Roth 401(k) contributions do not reduce your taxable income. The money in a Roth 401(k) grows tax-free, and when you withdraw the money in retirement, the distributions are also tax-free. If you think you are going to be in a higher tax bracket in retirement—or generally think tax rates are going to increase in the future—Roth 401(k) contributions may be the right choice for you. If your employer offers a 401(k) match then you will still get the match if you make Roth 401(k) contributions, however, the match will be placed in a Traditional 401(k) account. Keep in mind, the contribution limit across Traditional and Roth 401(k)s is a combined limit. For example, you could not contribute $19,500 to both a Traditional and a Roth 401(k) in 2021—you can only contribute $19,500 total across both. You can split your contributions so that a portion goes to the Traditional and a portion goes to the Roth. Contributions are made on a calendar year basis. Traditional IRA IRAs (Individual Retirement Accounts) are not offered by an employer, which means you have more control and flexibility with the investments and the provider you choose. As long as you earn taxable income you can contribute to a Traditional IRA, and the maximum contribution you can make for 2020 and 2021 is $6,000. If you are over age 50, you can contribute $7,000. Money in a Traditional IRA grows tax-free, and is normally taxed when you take distributions in retirement. Additionally, the IRS generally requires you to start taking distributions from a Traditional IRA starting at a certain age. You can also get a tax deduction on your Traditional IRA contributions in the year you make them. Your ability to deduct, though, can depend on if: You are covered by a retirement plan through work You are not covered by a retirement plan through work Some investors choose to roll over their 401(k)s to a Traditional IRA in order to consolidate their investments at the provider of their choice, or to switch to a provider with a lower fee. For investors looking to make backdoor Roth conversions, it is wise to move an old 401(k) into a current 401(k) if that option exists, instead of a Traditional IRA. Roth IRA Unlike Traditional IRAs, Roth IRA contributions offer no ability to receive a tax deduction. You contribute to a Roth IRA with after-tax dollars, and when you take distributions from your Roth IRA in retirement they are tax-free. Similar to Roth 401(k)s, making Roth IRA contributions is beneficial if you think you will be in a higher tax bracket in retirement than you are now. Another perk is flexibility. Roth IRAs do not require you to take minimum distributions like Traditional IRAs do. Additionally, you can withdraw your contributions to a Roth IRA at any time without taxes or penalties. If you make over a certain amount of income, you cannot contribute to a Roth IRA directly. Roth IRAs have the same contribution limits as Traditional IRAs ($6,000 or $7,000, depending on age), but that limit is the maximum amount total across both types—meaning you cannot contribute the maximum amount of $6,000 (or $7,000) to both a Roth IRA and a Traditional IRA in the same year. Unlike 401(k)s, you can contribute to an IRA up until that year’s tax filing deadline. So for example, you contribute to an IRA for the 2020 tax year up until April 2021. Health Savings Account (HSA) Health Savings Accounts (HSAs) should be used as an option to set aside money for retirement if you have already filled up all your other retirement account options. Contributions to an HSA are tax-deductible, and distributions from an HSA are tax-free if you use the money for medical expenses or related costs. If you allow your HSA to invest and grow over time you can withdraw the funds at age 65 without triggering a penalty. Distributions from your HSA at age 65 or over would be treated similarly to distributions from a Traditional IRA. In 2020 and 2021, you can contribute up to $3,500 to an HSA if you are a single tax filer, and up to $7,000 if you have a family HSA. For 2020, the limits are $3,050 for single tax filers and $7,100 for families. Keep in mind that you can only contribute to an HSA if you are enrolled in a high-deductible health plan through you or your spouse’s workplace. HSA contributions are made on a calendar year basis. Need Advice? Within a Betterment account, we can provide additional advice regarding which accounts you should consider funding and in what order. You can even sync up your 401(k)s and other financial accounts to see an overall picture of your finances. Get started or log in to complete your retirement plan and see personalized savings advice. Our licensed financial experts also offer advice packages for retirement planning and more. Betterment is not a tax advisor. Contact a qualified tax advisor to understand your personal situation. This article is provided solely for marketing and educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that this article is part of a general offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account.

Diamond Hands And Financial Plans: Betterment’s Advice For Investing In Crypto Is there a way to invest in cryptocurrencies responsibly? We certainly think so. Here are five tips to help guide you through the process. Even though cryptocurrencies have only been around for a short period of time, it’s abundantly clear that they’re here to stay. As a financial advisor, we at Betterment want to share our guidance on how to invest responsibly in cryptocurrency, if that’s something you choose to do. Fortunately, Betterment has a set of five universal investing principles that serve as a guide for the investment advice we give our 600,000+ customers, and that can help you make educated decisions about cryptocurrency yourself. 1. Make a personalized plan. As an investor, you have your own unique goals and values. Depending on those goals and values, the role cryptocurrency plays in your overall financial plan—if it has a role at all—will vary. Let’s start with your personal values. Many individuals are fans of cryptocurrency for reasons beyond just the potential to see their net worth go “to the moon.” You may be fascinated with crypto from an engineering perspective, or maybe for the societal impact it could have. Ultimately, it’s okay to invest your money in a way that reflects your personal values; just do so in an informed, principled manner. The second component of personalization is your financial goals. Your goals will also affect if and how cryptocurrency should be implemented into your portfolio. For example, if your child is going to college next year, their tuition money likely shouldn’t be invested 100% in Dogecoin. The volatility is far too large for a goal so short-term. Likewise, your emergency fund shouldn’t be held in Bitcoin either, because of the large price swings it’s experienced over the past few years. But, if you have a play account on the side, or a long-term goal where you’re able to tolerate more ups/downs, cryptocurrency may be an appropriate component of your portfolio. The overall point is that, just like any other investment, there is no one-size-fits-all answer: The best financial advice incorporates the unique goals and values of each person. 2. Diversify your investments. Even if cryptocurrency as an asset class may be here to stay, it’s impossible to know which cryptocurrencies will thrive and which will go extinct. There are currently over 4,000 unique cryptocurrencies, with new coins popping up seemingly every week. It’s likely many, if not most, will fail. With any type of investment, it’s not wise to “put all your eggs in one basket.” That’s why diversification is a critical piece of any financial plan.  In early 2021, the cryptocurrency market as a whole passed $1 trillion for the first time. That’s quite an accomplishment. But when compared to the size of the global stock and bond markets, we see just how new and small cryptocurrency is. All the cryptocurrencies combined total just about 0.5% of the global stock and bonds markets, which exceed $200 trillion. Global Market Capitalization of Stocks, Bonds & Cryptocurrency Sources: Reuters and SIFMA If you take a market capitalization approach, crypto would make up about 0.5% of your overall portfolio. Even if you are very bullish on crypto, Betterment doesn’t recommend it exceeding a maximum of 10% of your portfolio. We also recommend diversifying across multiple cryptocurrencies. 3. Prepare your taxes. Tax management is part of any investment strategy. Afterall, it’s not what you earn, but what you keep. When it comes to the taxation of cryptocurrency, the word that best describes it is “confusing.” If you’re going to invest in crypto, be sure to comply with all relevant laws and reporting requirements. The IRS published an FAQ page that addresses most common questions, such as: How is virtual currency treated for Federal income tax purposes? Will I recognize a gain or loss when I sell my virtual currency? Where do I report my capital gain or loss for virtual currency? If you invest in crypto, one strategy you may consider to manage taxes is tax loss harvesting. Betterment implements this strategy at the flip of a switch for our investment customers and we’ve automated the process so that our customers don’t have to do it manually. For example, losses that Betterment harvests can be used to offset gains in your cryptocurrency investments. 4. Weigh the overall costs and value. With all the hype and talk of double-digit—even triple-digit—growth in the world of cryptocurrencies, it’s easy to forget about the potential costs incurred from investing in them. Costs, when taken holistically, not only include how much you pay out of pocket, but also the execution quality of your trades, and the opportunity cost of your time. Depending on where you buy and sell cryptocurrency, you could pay transaction fees of over 1% for each trade. Newer cryptocurrencies, or those that don’t trade very frequently, may have larger bid-ask spreads. This means the price for which you can sell your cryptocurrency is lower than what it would cost you to purchase more. Lastly, when there are large price swings, you also must be careful about order execution. All of these direct or indirect costs can chip away at your take-home returns from trading cryptocurrency. 5. Grow investing discipline. Warren Buffet is famous for saying the market is “a device for transferring money from the impatient to the patient." He was referring to the stock market, but the saying also applies to the cryptocurrency market. Almost all investments have ups and downs, and the cryptocurrency market is no different. Bitcoin lost 80% of its value in 2018, over 1,000 currencies have failed, and stories of fraud are not hard to come across. These challenges -- price shocks, bankruptcy, panic, theft -- are not unique to crypto; however the risks are magnified because of the new technology, lack of regulation, and intense media hype around the cryptocurrency market. You must be willing to HODL, even when your portfolio is dropping. As an asset class, cryptocurrencies are extremely volatile, and it’ll likely be the disciplined investors who’ll be rewarded. Before you purchase any crypto, make sure doing so is appropriate for your risk tolerance, and that you have a plan in place for if and when you encounter volatility. Manage your investments purposefully. Cryptocurrency is a novel type of investment, and carries a lot of risk. That’s why having a clear set of investing principles is important. These principles can help guide your investment decisions and help you avoid getting caught up in the news hype of particular cryptocurrencies.

Betterment’s Women Leaders Share Their Best Career Advice Nine women leaders across Betterment talk about their work, leadership, and advice for the next generation. In the full year since COVID-19 fundamentally upended our realities forever, Betterment adapted and grew alongside a changing society, industry, and tumultuous economy. That’s why this Women’s History Month, we’re taking a moment to learn from and appreciate the women who are leading Betterment into the future, by taking a look at their invaluable insights and experiences. We asked nine women at the helm of various departments across Betterment to talk about their work, leadership, and advice for the next generation. What advice do you have for women who are just starting out in their careers? Sarah Levy, CEO: Find something that you are passionate about. You will spend many hours of your life at work and it's best to love what you do. Katherine Kornas, VP of Product: Early in my career, I remember having a conversation with my dad, who worked at General Motors his entire career, about how I always felt like I was “getting it wrong” because I didn’t come up with the same solutions to problems that my colleagues did. “You know what, Kate?” he said. “You think differently than other people. That’s not a sign that you’re unqualified. It’s a sign that you’re an extremely valuable employee because you’re able to see things no one else sees.” Susan Justus, Head of Talent Development: Allow yourself to be vulnerable: Vulnerability is not a sign of weakness and can be your greatest strength. Vulnerability can create a culture of trust and respect. Admitting our mistakes, seeking help, and acknowledging we don’t have all the answers are all expressions of vulnerability. Pat Advaney, Senior Director, B4B Marketing: Don't diminish the value of skills that come easily to you; something that may not be "rocket science" to you is likely something that others struggle with. Own your expertise! Kim Rosenblum, CMO: Try things out; it's hard to know what you will love (or hate!) without hands-on experience. Take time to find the intersection of "what you love" and "what you are good at." Once you know that magic combo it will be easier to create a career path where you will be happy and successful! Veronica Mendoza, Senior Director of Growth Marketing: Don't be too hard on yourself! You can strive to be good without beating yourself up for not being perfect. Can you tell us more about self-care, and how you accomplish it as a leader? Kate Smith, Senior Director of People Strategy & Operations: This is a hard one. As a working mom of three young kids, I find I'm constantly focused on the care of others, and it's only been recently that I've realized the need to carve out time for myself. Once a week my husband and I get the girls to bed, and then I'm off to play a sport I love for an hour, helping me both mentally and physically! Johanna Richardson, Head of Product: Not going to lie: finding balance during the past year has been a constant struggle. Juggling work, normal parenting, and remote schooling all in the place where I live has seriously blurred the lines between all aspects of my life. My daughter has crashed many-a-meeting, but I try to remind myself how cool it is that she gets to see her mom at work up close. That said, carving out some time for myself every day to go for a run or just binge-watch some Netflix is a must. Also, I've really upped my skincare game. Veronica Mendoza, Senior Director of Growth Marketing: I'm not much of a routines or rituals type of person when it comes to self care, but I do believe in Body's Choice. Whether it's a long walk, a night of mindless TV-watching, or just consistently taking a workday lunch break, I try to listen to what my mind or body is telling me it needs—before it starts yelling. Sarah Levy, CEO: It's important to turn off after hours. For me, spending time with family and friends, walking in the park with my husband and dog, and reading books keep me happy. Kim Rosenblum, CMO: It's personal. I try and exercise 5x a week. Even if it's for a short amount of time. And when I exercise I keep a notebook handy because endorphins generate ideas! I also only take on volunteer or extracurricular projects if I have the time. Katherine Kornas, VP of Product: Too much routine is often the source of burnout for me, so when I start to feel like I’m doing the same things, day after day, I’ll do something differently, even if it's uncomfortable at first. Tweaking my schedule even just a tiny bit helps force my brain out of its groove, and I find that I’m able to look at problems and opportunities in new, insightful ways afterwards. What’s your leadership style? Lucy Babbage, SVP of People: I focus on building personal relationships and getting to know my colleagues' personal goals in career and life, and doing what I can to support those goals in the context of what the company needs. I also like to bring some silliness and laughter to the table, so I hope my team thinks I am funny! Susan Justus, Head of Talent Development: I am a people first leader. I lead with care and empathy. I engage my team by asking open-ended questions and creating space for their input and ideas and make myself available to support and guide the process along the way. I am a true believer that people grow when they are provided autonomy, respect and trust to contribute at their full potential. Kate Smith, Senior Director of People Strategy & Operations: Player / coach. I'm ready to roll up my sleeves and get into the details, but can take that step back to be able to take a more strategic view. I want my team to feel empowered and accountable, but I'm here to support them every step of the way. Kim Rosenblum, CMO: Over many years I've learned my strengths and weaknesses. When I'm at my best, I'm supporting people to do their best job—to maximize their talent and potential. Veronica Mendoza, Senior Director of Growth Marketing: I like to think I have a supportive, consultative leadership style. Over time, I've also learned that not everyone responds to a single style in the same way, so I also believe it's most important to be adaptable. Getting to know people individually makes it easier to find the sweet spots between disparate styles, leading to stronger relationships and, very often, better business outcomes. Johanna Richardson, Head of Product: I try to lead with empathy and transparency. I want to make sure that everyone on my team has the space and autonomy to shine and feels supported in their careers. What about your work at Betterment are you most proud of so far? Sarah Levy, CEO: It's pretty early in the journey for me. I'm really enjoying getting to know the team, the industry, and the amazing things that differentiate Betterment: performance, ease-of-use, transparency, and personalization. Susan Justus, Head of Talent Development: Building the Talent Development function from the ground up over the last four years. Creating a core skill training curriculum, leadership development tracks, one-on-one coaching programs and various other tools/resources that support growth and development for employees. Pat Advaney, Senior Director, B4B Marketing: Publishing lots of B4B content that has helped drive traffic to our site and helps educate our employer clients. Kate Smith, Senior Director of People Strategy & Operations: I'm proud of the direct impact my work has on our people and culture. A lot of what we do is behind the scenes, but to see how that work has contributed to Betterment being a great place for our team members to grow and develop their careers, all while creating and supporting an amazing product for our customers—it's very rewarding to say the least! Kim Rosenblum, CMO: It's been a fast first month! I'm learning so much, and I feel very welcomed. I appreciate that everyone here is helpful and a teacher. I'm excited to learn more about our existing and potential customers, building an emotional and resonant brand, and marketing incredible products that meet a vital need. Our mission is quite inspiring! Lucy Babbage, SVP of People: I'm proud to have been part of an ever-evolving team that has made Betterment such a special place to work over the years and also that I finally got our new kitchen construction wrapped! Johanna Richardson, Head of Product: I'm really proud of the team we've built. Truly a stellar crew. Anything else on your mind that our readers should know about? Katherine Kornas, VP of Product: I’m queer-identified and grew up in a conservative, religious Midwest suburb. I didn’t fit in. My experiences, while heartbreaking at times, helped instill a tenacity in me that I often call upon during my career, particularly when I’m faced with tough problems and ambiguity. I believe I’m a better leader because of it—and am proud of that. Kate Smith, Senior Director of People Strategy & Operations: I'm a proud mom to three little girls, and I feel so grateful to work at a place like Betterment where I feel so supported as I try to juggle work and family priorities. Sarah Levy, CEO: I love leading a business with such a positive mission—to empower customers to make the most of their money, so they can live Better! If you’re interested in joining our team, check out the Betterment careers page! We’re always looking for passionate candidates to join our company.

Tax Planning Happens Year Round, Not Just When You File Knowing how your investments affect your tax bill can help you save money not just when you file, but for years to come. Thinking about reducing your taxes may not be your favorite hobby, but the truth is that it can help you keep more of what you earn. While you can't control the stock market, you can control some of your tax obligations. To identify whether your long-term investment strategy is running efficiently, take a few minutes to review these year-round tax optimization tips. 1. Invest Your Tax Refund Would you have guessed that a smart place to invest your tax refund is in an IRA? Normally, investors might divert a portion of the refund into this account as part of a well-rounded investment strategy and claim the deductions on your taxes next year. Invest your refund, and you may get a portion of that back in tax savings. Stay in the habit of investing your refund as soon as you receive it, and over time you’ll feel good when you see your returns start to add up. The IRA contribution limits for 2020 and 2021 are the same. If you are under 50, you can contribute $6,000 to your Traditional or Roth IRA. If you are over 50, you can contribute $7,000 to your Traditional or Roth IRA. 2. Think Several Moves Ahead Investing is complex, and from time to time you might have to sell some of your investments. It might be to rebalance your portfolio, or maybe your goals have changed and your investments no longer match their intended purpose. Smart investors think ahead before blindly selling parts of their portfolio, because selling certain assets could potentially lead to capital gains taxes. By carefully choosing which investments to sell, you can help minimize hefty tax consequences. One way to do this is to partner with an investing company that has the tools to help make this process easy to access and understand. Here at Betterment, we are continuously rebalancing your portfolio as tax-efficiently as possible, using an automated method we call TaxMin. Further, our Tax Impact Preview tool lets you see the estimated potential taxes on a sale before making the trade. 3. Reorganize Your Investments Another way to potentially leverage small tax advantages for long-term growth is to organize your portfolio. Move tax-inefficient investments, like international stocks and other assets that are taxed at higher rates and more frequently, into a tax-deferred account, such as an IRA or a Roth IRA. That way, you can enjoy the potential for higher growth while also facing less of a tax burden. Similarly, you can also move tax-efficient assets, such as municipal bonds, into taxable accounts. For further guidance, we’ve outlined the tax implications that accompany each type of investment account. As part of your reorganization efforts, you may want to consider setting up Tax Coordination, which allows us to optimize this practice of asset location for you. 4. Benefit from Losses It’s never fun to watch your assets lose value, but did you know that in some cases, losses can actually benefit you? You can receive a tax deduction for your losses that can help cancel out the taxes you owe on assets that have gained value, or, you can use up to $3,000 worth of realized losses per year to lower your income—and excess losses can even be carried forward. The practice of selling assets that are currently at a loss in order to reduce your overall tax liability is called tax loss harvesting. You may want to consider our Tax Loss Harvesting+ feature (TLH+), which allows Betterment to automatically capture losses as the market fluctuates at the flip of a switch. Smart investors should always remember that investments involve risk and may result in loss. 5. Give to a Worthy Cause While it’s important to secure your own financial future, many investors see community support as an important additional goal. Consider donating to a nonprofit organization in your community. Not only are you helping to improve the quality of life in your locale, you can potentially claim a deduction from your income taxes. Fortunately, it sometimes can pay to do the right thing. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a tax professional for more information.

Q&A: What’s The Future Of Investing? Betterment’s VP of Behavioral Finance & Investing discusses entertainment investing, its impact to long-term investors, and how to know if day-trading is right for you. Millions of people are jumping into the stock market. We’re here for it. It seems easy. It can be fun. Isn’t it for everyone? Plus, you never know when you could take a little play money, trade a hot stock, and double it up. But your real money? That long-term, easy-living, retire-where-and-when-you-want money? That’s our forte. Buying into the entire market, setting goals, saving easy—that’s investing for better. It won't make you a millionaire overnight. But it could probably help make you a millionaire over your lifetime. We asked Dan Egan, VP of Behavioral Finance & Investing at Betterment, to comment on the longer term effects of entertainment investing and how to know if it’s right for you. What happened with Gamestop? What are the broader trends at play here? Dan: The rally and collapse in GameStop hit basically all the classic notes of a bubble and burst, with some added intrigue around short squeezes. To understand the specifics of what occurred, start with this article from The New York Times: “4 Things to Know About the GameStop Insanity.” If you’re interested in exploring some of the psychological aspects behind investor behavior, I touch on that in “Memestonks: What’s Different About This Market?” What is “entertainment investing” and how is it likely to evolve in the future? Dan: It’s investing to entertain yourself, to get stimulated or excited, to relieve boredom. It’s not about long-term growth in the economy, or discounted free cash flow. It’s about being in on the hot new stock, or seeing huge movement in your accounts, and being able to talk about it with other people. There’s a reason BarStool Sports founder Dave Portnoy got into day-trading: the excitement of winning and losing, the ability to yell at the refs and regulators, the game we can all access and play regardless of how small. And finally, don’t forget: the thrill of making and losing money. How does the internet and social media change investing? Dan: It speeds everything up, usually not in good ways. Stock markets already operate at the millisecond. Professionals have news parsed, analyzed, and acted upon by algorithms faster than any human. Social media and always-on news means you hear news faster than ever before, and with greater variety in what you hear. Conspiracy theories and misinformation spreads faster than boring truths. Once you’ve shown interest in a stock, your Facebook, Twitter, Youtube, and TikTok accounts will all double down on that content, hoping to keep you for a few more seconds, a few more ads. This reduces the diversity of perspectives you see. Thus, social media encourages large, dispersed groups of people to coordinate on a single stock or issue, giving it the feel of a grassroots movement. This means that high prices and short-term volatility are more likely to occur, especially in companies consumers interact with. These dynamics have always been at play in markets—that’s not new. Now we’ve sped them up through the internet and fractured social networks. How is the investing industry changing? Dan: Over the past 40 years there’s a consistent trend towards consumers paying less and less for trades, investment management, etc. That trend recently crossed a tipping point, with some consumers paying $0 for trade commissions, $0 for investment management, or $0 for advice. Most folks love free, so companies that offer free trading have grown dramatically in recent history. Of course, those companies are still getting paid, just not directly from the general investor. Free trading services often make money by sending your trades to people who pay to trade against you. These are high-frequency trading shops, hedge funds, etc. When you sell a share for $99.96 and a buyer pays $100.00, these brokerages get the $0.04. This is called the ‘spread’. Do that billions of times, and you can see how they make money. So, they want users to trade a lot. They want users to trade in stocks with bigger spreads. And they don’t care if users make or lose money—they win as long as users trade. Users are the gravy. So it still costs you, but you can’t see how much. You can easily compare trade fees, but not the spread you pay. It is easier than ever to invest well: the minimums are low, the costs are low, diversification is easy, and the markets are reasonably well regulated. It’s also easier than ever to invest badly: you can access leverage, derivatives, and leverage to buy speculative, concentrated assets you don’t really have any underlying understanding of. How will these recent trends in investing impact long term investors? Dan: For the most part, positively. Gaining exposure to genuine economic growth is easier than ever. Holding a broad-based, diversified portfolio means when a new company gains ground, you were already invested in it. That’s part of why Betterment invests beyond the S&P 500: a diversified portfolio with a mixture of stocks and bonds and international exposure helps mitigate risk. Has anything like this happened before, and what has been the impact? Dan: Yes, bubbles—and bubbles popping—happen all the time. They all have a slightly different flavor: 2001 was the original tech/internet bubble popping, 2008 was based on leverage in the housing market, etc. The biggest difference between any two stock-market cycles is whether or not it impacts the real economy, generally through de-leveraging. The stock market can crash without an impact on the real-world economy because all assets are just valued lower. But when that lower valuation causes deleveraging and bankruptcies, the real-world is impacted and it’s dramatically worse. Should I start investing in individual stocks too? How do I know if it’s right for me? Dan: That depends on if you want to. You don’t have to if you don’t want to. I think of it much like this: I could bake my own bread, change the oil in my car, and build my own custom closet shelves. But should I? Here are questions I ask myself whenever I’m tempted to D-I-Y: Do I really want to do this? Will I enjoy it? Will it reduce my time doing other things I enjoy more? How much more will it cost me if I do it wrong, or to a lower quality? Will I need to pay for tools that professionals already have? If I want to do it to learn, that’s great. I’ll need to be deliberate about learning, which means setting up high-fidelity feedback loops about successes and failures. Am I ready to recognize and learn from failure? Am I ready and willing to fire myself if I’m not good at it? It’s fine to have a hobby, but with most hobbies we don’t harbor a belief we might get rich quickly with them—we do them because we enjoy them. Make sure you’re enjoying yourself in the process. How can services like Betterment compliment an active trading strategy? Dan: It’s important to remember that you don’t have to choose between being a long-term investor or an active trader. Long-term investing can be a great compliment to a trading strategy, especially if you want to meet your financial goals like retirement, saving for a home, or saving for college. Betterment helps you invest in what matters to you by helping you define your goals, recommending how much you should save, and tailoring your portfolio recommendations based on when you need the money. For those who do want to actively trade, you can set up a “get rich” portfolio and a “stay rich” portfolio. For example, you can open a riskier "get rich" portfolio at a broker that allows you to day-trade stocks and crypto, then set up a long-term "stay rich" portfolio with Betterment. This way, you can day-trade guilt free without compromising your financial goals. To start, you can allocate about 10% to 20% of your wealth to your “get rich” portfolio, and the remainder to the “stay rich” portfolio. If or when your “get rich” allocations grow to be 40% of your overall wealth, rebalance it back down to 10% to 20%. If you're lucky, you might still get rich and stay rich. If you're not, then the best case scenario is that you still have your long-term investing and savings squared away for future use and you don’t have to start saving all over again.

Taking Time Off From Work Can Be A Secret Tax Opportunity If you’re taking off time from work—e.g. sabbatical, leave of absence, or traveling the world—you might be able to take advantage of a special tax boon if you put money toward retirement. If you’re taking time off work, it’s probably not for tax reasons. But did you know that doing so could open up a major tax opportunity. It turns out, if you work less than half the year—without becoming dependent on another person—you may be able to take advantage of a special tax credit that could save you hundreds of dollars. And, get this: This year may be one of the only times in your life you’re eligible. Today, we’ll show you how you can potentially take advantage of the retirement saver’s credit. The only major move you have to make is to contribute to an IRA (which you might want to make a Roth IRA) or your employer-sponsored retirement plan, like a 401(k) or 403(b). Why is this tax opportunity a big deal? It’s a win-win. You could potentially pay less in taxes simply by saving for retirement. But you’d have to save this calendar year. If you can put away money for your future self right now, while you aren’t working, you’ll actually get more back from Uncle Sam for your current self. Chances are, you may never be eligible to receive this tax credit again if you normally make more than $32,500 for 2020 ($33,000 for 2021) per year as a single person. It works this year because even if you make a high amount per month, you’re only working a few months in total for the year. It’s one of the rare triple tax advantages in life. This tax credit helps reduce how much you pay in taxes for this year, while letting you save into a Roth IRA or Roth 401(k) where gains are tax deferred, and you don’t have to pay taxes on withdrawals in retirement. In this way, it’s one of the few opportunities where the government offers three tax advantages at once. How does this tax opportunity for not working work? Getting the retirement saver’s credit during a year of taking time off isn’t going to be possible for everybody, but if you plan the next few months effectively, it might just work for you. Let’s walk through exactly what you’d need to do to take advantage. 1. You have to file taxes as an independent person. If you’re taking time off in May, then depending on what choices you make next, you’ll either be independent for the year (supporting yourself in the government’s eyes) or you might be dependent on somebody else (like a family member). If you plan to work and live off existing savings while you take time off, then more than 50% of your lifestyle support will come from yourself, and you can file your taxes independently. This situation opens up tax credits and deductions for you that otherwise would not be there because somebody would be claiming you as a dependent. One of these is the Retirement Savings Contribution Credit. 2. You have to be a full-time student for less than 5 months during the year. In general, if you’re taking off to start school, you’re usually not eligible for this credit, but there are a few exceptions. For instance, if your school is on a quarter/trimester schedule and you’re only taking one term, then you could be eligible. Also, if you’re only enrolled part-time and still supporting yourself, then you could be eligible too. 3. Because you’re only working 50-60% of the year, your annual income will likely be significantly lower than in future years. Because you’re only probably working six or seven months of the year, your federal tax bracket will be far lower than you might expect for future years. If you make a salary, and the annual amount is $50,000, then you could earn as little as $25,000 in gross income. You can qualify for the saver’s credit if your income for the tax year is less than $32,500 for 2020 ($33,000 for 2021) if you’re single and less than $65,000 for 2020 ($66,000 for 2021) if you’re married filing jointly. The level of credit you get is tied to how much you save and depends on the size of your income. If you live and work in an area with a low cost of living, you could have a respectable entry salary of $36,000, and you could be eligible for the maximum credit. We have the entire Saver’s Credit income table below for 2020 and 2021. 4. Start saving into a Roth IRA or employer plan when you’re ready. If the three steps above apply, you’re ready to go after the saver’s credit. Your next step should be to start putting away money for retirement. We suggest using a Roth account, given that if you qualify for the credit, you’re almost certainly making less money than you expect to take during retirement. You can read more about why a Roth accounts might make sense for you, but the short of it is this: any employer plan you’re eligible for may not offer a Roth 401(k)/403(b), but you can always open a Roth IRA as an individual. 5. You need to have a tax liability. The retirement savers credit is non-refundable which means that it cannot reduce your tax liability below zero. Some other credits like the Earned Income Tax Credit are refundable which means you may receive net payout (otherwise known as a negative tax) from the IRS. One of the challenges is keeping your income low enough to qualify for the credit but high enough to have a tax liability that will allow the greatest amount of the credit to be used. 6. Decide how much you’ll save each month. The final step is to decide how much you’ll save and to set up automatic savings deposits. To qualify for the credit at all, your gross salary isn’t likely to be more than $54,000 for the year (and more likely, it will be less)—or just over $4,500 per month before taxes. Since IRA contributions are limited to $6000, you’d need to contribute $2,000 to capture the maximum retirement saver’s credit, which could easily be a half of a month’s salary. In other words, maxing out might be aggressive as you’re getting your first post-collegiate paychecks. But even if you don’t max out, every amount saved supports your long-term retirement and your 6-month chance to get the retirement saver’s credit. If you have a lot in savings, then you can definitely consider transferring savings account money or even taxable invested savings into a Roth IRA to take advantage. FAQs about the Retirement Saver’s Credit So, there you have it: the tax incentive that few people taking a sabbatical or time off work think about using, but many should consider. What other questions might you have? Should I save into my new employer’s 401(k) or an IRA? The great thing about this credit is that both your contributions to your employer’s plan and your IRA help you qualify. So, if you can contribute to an employer plan for part or all of the year, which one should you choose? The answer is that it depends. If your employer plan offers a company match on your contributions, then you should certainly contribute there to capture the match—that’s free money. However, as explained above, it probably makes sense to contribute to a Roth plan—where you pay taxes now and not in retirement—so if your employer doesn’t offer a Roth 401(k) or 403(b), you may want to contribute to get the match, then save further in a Roth IRA. Moreover, some employer plans may have higher fees on the investments provided than you might find by opening a Roth IRA. Is there any way I can qualify for the saver’s credit if I my salary is greater than $66,000? There may be situations that help you qualify for the saver’s credit. For instance, if you get married this year—maybe taking a 6-month honeymoon using savings—then you and your spouse could feasibly qualify for a partial credit if your annual income is not more than $66,000 for the year—meaning your combined salary could be far greater. Also, as you’ll see in the table below, the limits are based on adjusted gross income (AGI), which isn’t just your gross income. Certain life situations can adjust your income, lowering it in a way that may help you qualify or increase your credit. Examples of ways you can reduce your AGI include: pre-tax employer retirement contributions, health insurance premiums,  medical expenses, saving into a health savings account (HSA), moving expenses, capital losses, school tuition or fees you paid, or student loan interest. What are the qualification rules for the credit? See the table below full table of adjusted gross income limits and partial credit rates. Be sure to read the IRS’ detail on the Retirement Savings Contribution Credit too. 2020 Saver's Credit Credit Rate Married Filing Jointly Head of Household All Other Filers* 50% of your contribution up to $1,000 per spouse AGI not more than $39,000 AGI not more than $29,250 AGI not more than $19,500 20% of your contribution up to $400 per spouse $39,001 - $42,500 $29,251 - $31,875 $19,501 - $21,250 10% of your contribution up to $200 per spouse $42,501 - $65,000 $31,876 - $48,750 $21,251 - $32,500 0% of your contribution more than $65,000 more than $48,750 more than $32,500   2021 Saver's Credit Credit Rate Married Filing Jointly Head of Household All Other Filers* 50% of your contribution up to $1,000 per spouse AGI not more than $39,500 AGI not more than $29,625 AGI not more than $19,750 20% of your contribution up to $400 per spouse $39,501 - $43,000 $29,626 - $32,250 $19,751 - $21,500 10% of your contribution up to $200 per spouse $43,001 - $66,000 $32,251 - $49,500 $20,251 - $32,500 0% of your contribution more than $66,000 more than $49,500 more than $33,000 Any tax information provided by Betterment is not a substitute for the advice of a qualified tax advisor. You should consult with your tax advisor to discuss tax-related concerns.

Put Your Tax Refund To Work—We’ll Show You How You finally got your tax refund. Now what? We’ll show you how to put it to use so that you can get the most of your money. Today is the day you’ve been patiently awaiting. You’ve just received your tax refund. While some ponder a vacation on the beach, others—such as smart investors like you—think about how they can invest the funds for the long-term. There is no one right strategy on how to use your refund, but here are some smart money moves you may want to consider. Pay down high-interest debt. Credit cards and personal loans typically charge interest rates as high as 15% to 30% on outstanding balances. Using your refund to pay off this debt is a wise move because it helps you avoid future interest charges on your outstanding balance. Many customers ask us the question—should I invest, or pay off debt? Check out this article if you aren’t sure where paying off debt falls on your priority list. Build a rainy day fund Like it or not, rainy days happen—and we need to be prepared to weather them. That’s why most financial planners recommend having a short-term savings account that holds 3 to 6 months’ worth of expenses. Unfortunately, not all of us have that much cash readily available to immediately access, which can expose us to additional risks in the event of an unexpected major expense or the loss of a job. Consider opening a Safety Net to stash away cash for emergencies. Increase your 401(k) contributions. Although you generally can’t contribute directly to your 401(k) from your bank account, you can increase your contribution rate through your employer and use your refund to cover daily living expenses. First, make sure you contribute at least the amount that your employer will match, if they have a 401(k) matching policy. If your employer offers a Roth 401(k), still consider making contributions, which can provide tax-free income in retirement and a hedge against future tax increases. If you are able, consider contributing the maximum amount for the year. For 2021, if you are under 50, the maximum contribution amount is $19,500. If you are age 50 or older, the maximum contribution amount is $26,000. Contribute to your IRA. If you are looking for another place to grow your retirement investments with additional tax benefits, consider contributing to a Traditional or Roth IRA. If you’re unsure which type of IRA is best for you, we have a tools and resources that can help you decide. For 2020 and 2021, if you are under 50, the contribution limit is $6,000. If you are over 50, the contribution limit is $7,000.  Remember that if you contribute earlier in the year, your future growth could be more than if you had contributed at the end of the year. Invest in education. Benjamin Franklin said it best when he stated, “An investment in knowledge pays the best interest.” Using your tax refund to save for education can turn out to be a wise decision. Tax-advantaged education savings accounts, like your state’s Section 529 plan, allow for your investments to grow tax-deferred. If the funds are used for qualified education expenses, you won’t have to pay taxes when you withdraw. Donate to charity. Giving feels good, but did you know it can also reduce your taxes? Donating to charity allows you to deduct your charitable contributions from your itemized taxes for 2020, while also contributing to causes you care about. You can read more about the rules for deducting charitable contributions on the IRS website. Make Energy-Efficient Home Improvements Using your refund to make energy-efficient upgrades to your home can help reduce your utility bills. The U.S. Government currently has a number of incentives to promote energy efficiency that you can take advantage of. The amount you reduce your utility bills by can then be saved and invested to help maximize the benefit. Good for the planet, good for your wallet—energy efficiency is truly a gift that keeps on giving. Get Started Ready to save? Get started or log in to set up a Safety Net, contribute to an IRA, or start giving to charity. If you plan to use your tax refund to save towards other financial goals, learn how to prioritize each goal. Please note that Betterment is not a tax advisor—please consult a tax professional for further guidance.

How To Make A Mega Backdoor Roth 401(k) Contribution Looking to boost your retirement savings? Contributing above the limit through after-tax contributions into a traditional 401(k) can help you maximize your savings with potentially great tax benefits. For most people that participate in a 401(k) plan through their employer, $19,500 is the maximum contribution (pre-tax and Roth) you can make to your 401(k) in 2021 (those age 50 and older get an additional $6,500 catch-up contribution). This “standard” contribution is considered to be an employee elective deferral. But what if your 401(k) plan could allow you to contribute more than this amount? And how much more? Potentially up to $38,500 more in 2021. After-tax traditional 401(k) contributions are less commonly offered by employers, but for heavy savers or high-income earners who do have this option, after-tax traditional contributions are a great way to try and maximize your overall retirement contributions. “Super-size Me”: 401(k) 2020 Contribution Limits 401(k) plans are a type of defined contribution plan where you, as the employee, make your own contributions to your retirement. In 2021, the total annual contribution limit to defined contribution plans is $58,000 (or $64,500, if age 50 and older). This $58,000 limit consists of your $19,500 contribution (combination of pre-tax and Roth), as well as any matching contributions your employer makes, employer profit-sharing, and after-tax traditional 401(k) contributions made. Any employer match would potentially reduce the amount of after-tax contributions you could make into a traditional 401(k). But if your employer does not provide any matching contributions nor profit-sharing, you could contribute up to an extra $38,500 on an after-tax basis to your 401(k). Tax alert – Even if your employer offers after-tax traditional 401(k) contributions, you may not be able to fully maximize the contribution due to plan limits and nondiscrimination testing for highly compensated employees. How Do After-Tax Contributions Work? Now that we’ve covered different types of contributions that could be made to your 401(k), how do they all work? The $19,500 salary contribution can generally be made as either pre-tax (traditional), or post-tax (Roth): When you make pre-tax contributions, the amount contributed to your retirement plan reduces your taxable income for that year, so that you get a tax break in the year contributing. When you withdraw in the future, you will pay ordinary income taxes on the full amount of the withdrawal, basis and earnings included. With post-tax Roth contributions, the amount contributed does not reduce your taxable income for that year, as you pay tax on the money before it is contributed. As long as you meet general requirements, withdrawals will be free of tax, earnings included. After-tax contributions into a traditional 401(k) are not tax deductible and grow tax-deferred, meaning that earnings will be taxed as ordinary income upon withdrawal. This is unlike general Roth 401(k) contributions, where earnings and withdrawals are tax-free. You might be wondering what happens to after-tax traditional 401(k) contributions after you retire or leave your company. IRS Notice 2014-54 states that earnings from these contributions while they are in the 401(k) would be rolled into a traditional IRA, where you will pay tax upon withdrawal. However, the original after-tax traditional contributions in your 401(k) are able to be rolled into a Roth IRA without paying taxes (since you already paid tax on the dollars contributed), where future growth and withdrawals are tax-free. Benefit To After-Tax Contributions For those who have the option and are able to make these contributions, it enables extra savings to be made into an account that grows tax-deferred rather than being saved to a taxable account, where you will owe annual taxes on dividends. After-tax traditional contributions allow you to indirectly contribute money to Roth-style accounts when you may not have been able to otherwise. For example, your income may be too high to make direct Roth IRA contributions or you may choose not to make Roth 401(k) contributions with your elective deferral because you’d prefer to make pre-tax contributions to reduce your taxable income. If that’s the case, the only other way you’d be able to get money into a Roth IRA for tax-free growth is to execute a Roth conversion, which may require you to pay income tax upon converting. The In-Plan Roth rollover Here is a strategy for how you can further amplify the benefits of after-tax traditional 401(k) contributions. If your employer allows you to make In-Plan Roth rollovers (not all plans offer the feature) – where you can effectively convert your traditional 401(k) to a Roth 401(k) – you can start the tax-free growth on your after-tax contributions even earlier. Any earnings on the after-tax traditional contributions would be considered taxable at the time of the In-Plan Roth rollover. The sooner this process is completed after the contribution is made, it would minimize taxable earnings. In other words, you don’t have to wait until you retire to get your after-tax contributions into a Roth 401(k). Steps To Take For Your Retirement Planning To see if your 401(k) plan offers after-tax traditional contributions, we recommend contacting your plan administrator. Note that Betterment for Business 401(k) plans currently do not offer the ability for you to make after-tax contributions to your Traditional 401(k), nor the ability to convert Traditional funds to Roth funds while the plan is active. Depending on each individual plan, these options could increase non-discrimination testing complexity and lead to unexpected refunds. Over time, we’ll continue to evaluate the value of these additional capabilities to our customers who hold Betterment 401(k) plans through their employer. For those that do have this option, you will want to consider all of the retirement accounts you have at your disposal, the tax benefits each offer, and your overall savings plan and cash-flow needs. If interested, you can speak with a financial planner to help you make the best decision for your retirement plan. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. This article is provided solely for educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that this article is part of a general educational offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account.

6 Tax Filing Hurdles When Investing Taxes can be confusing, even for the most savvy investors. Enter Eric Bronnenkant, our Head of Tax, with six things to look out for when filing your taxes while investing. Whether you’ve been investing for years or not, holding money in an investment account can make your filing process a bit more complicated. I’m here to help guide you through that process with a few tips. 1. Haven’t taken a withdrawal from your taxable account? Still expect some taxable income. Even if you haven’t withdrawn funds from your account, dividends you’ve earned and capital gains from sales in your account may still be taxable. Sales that don’t result in withdrawals can come from rebalancing that helps keep your portfolio on track, as well as any allocation changes you might have made. The dividend and investment sales will be reported to you on a Form 1099-B/DIV. Interest on your Cash Reserve account will be reflected on a Form 1099-INT. Learn more » 2. If you only have IRA investments, your taxes may be simpler than you think. One of the key benefits of investing in an IRA is that all the income inside the account is tax-deferred. As long as you leave your funds in the IRA, you do not report any of the dividends or investment sales. If your only investments are within an IRA or 401(k), you aren’t typically required to report investment sales on Schedule D/Form 8949 (which you might experience as buying tax software that includes investments), so that may make your filing process more straightforward. Learn more » If you do take an IRA distribution (make a withdrawal), you should expect to receive a Form 1099-R from us. An IRA distribution may or may not be taxable, but it is always reportable. 3. A globally diversified portfolio is a good strategy. Know how it can affect your tax filing. Diversification is one of the key tenets of Betterment’s portfolio advice. International investments help decrease the risk of a portfolio heavily invested in U.S. stocks and bonds. Because of this, you should know that these foreign investments add a few steps when you’re filing your taxes. You’ll need to calculate the foreign tax credit to mitigate the double taxation between the US and foreign countries. Learn more » 4. Tax-smart investing starts with government bonds. Look out for reporting that income. To be as tax-smart as possible, you’ll want to take advantage of every tax benefit available to you. One benefit built into Betterment’s portfolios is income from government bonds, which is exempt from state and local income taxes due to federal law. It is common for investors to overlook this tax benefit and subject all of their taxable interest to state and local income taxes. Be more tax-smart by being sure to report income from government bonds on your state tax returns. Learn more » In addition, municipal bond income is generally exempt from federal income tax. The rules at the state level are a little more tricky. If your resident state has an income tax, it will tax all out-of-state muni income. Knowing what portion of your income falls into the in-state versus out-of-state is important to paying the appropriate amount of tax. Learn more » 5. 2020 markets were volatile, which means Tax Loss Harvesting+ was hard at work.1 Stock and bond markets are inherently volatile. While you hope that they appreciate in value over the long term, it is expected that there may be substantial fluctuations in the short term. Betterment’s Tax Loss Harvesting+ helps to take advantage of volatility by “capturing losses,”—selling investments at opportune times and buying similar replacement investments that do not violate certain IRS rules. These captured losses can then be used to help offset any gains you’ve recognized or against other income in the tax year up to $3,000. If there are any additional losses, they may be carried forward until used in a future year. Learn more » 6. We saw new tax legislation starting in 2019. This changed IRA contribution rules and required minimum distribution provisions. The SECURE Act, which was passed in late 2019, paved the way for retirement rule changes starting in 2020. Traditional IRA contributions have historically been limited to owners under the age of 70 1/2. The age restriction has been lifted starting for 2020 tax year, and even 100 year olds can now contribute to a Traditional as long as they (or their spouse) have “earned income”. Non-spouse beneficiaries of IRAs and 401(k)s historically had been able to withdraw funds over the beneficiary’s life expectancy. For deaths that occur in 2020 or later, the beneficiary is now required to completely distribute the entire account by the end of the 10th year after death. Learn more » Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. 1Tax Loss Harvesting works automatically for customers who have elected the service in their accounts.

4 Questions To Help You Invest For Your Financial Goals There are many factors to consider when investing for the first time: Use these four questions as a guide to help you choose the best investment strategy for your financial plan. Warren Buffet’s definition of investing is, “laying out money now, in expectations of receiving more money in the future.” Investing starts with ensuring that nothing gets in the way of you “laying out money now.” This means having a solid financial foundation by doing the following: Saving three to six months’ of expenses in an emergency fund, so your savings, not investments, cover unexpected costs. Paying off high-interest debt, so you are making money from companies rather than paying interest to companies. Contributing enough to your 401k plan to at least get a match from your employer, if you’re offered one: get all the free money you can! Once your financial foundation is in place, use the four questions below as a guide to help decide how to invest your money: 1. What’s the goal for the money? Your goals should always inform what you do with your money, but understandably it can be difficult to envision long or short term life goals as events that need to be saved for. Here are some examples of life events that can be translated into financial goals: Short-term: Wedding gifts, vacations, a new laptop, an engagement ring. Long-term goals: A house downpayment, future college education, retirement. Envision all of your possible goals that may put you into debt if you didn’t begin saving for them now. Once you have a list, you can move on to determining where and how they will be invested. 2. When do you need the money? Recessions, on average, happen every five years. For this reason, some conservative investors decide to keep money needed in five years or less out of the market, while moderate to aggressive investors typically shorten this time period. For financial goals with a time horizon of five years or less, here are some alternatives to high-risk investments where you can save your money: Cash accounts: An excellent alternative to a standard savings account from your bank, cash accounts typically earn you more, have more flexible transfers, and allow you to easily access your money. Betterment’s Cash Reserve is FDIC-insured for up to $1,000,000† once deposited at our program banks, and has no minimum balance. Low-risk investment accounts: Consider investing your shorter-term goals in a low-risk portfolio instead. Betterment offers various low-risk ways to invest, and we give you the opportunity to choose any allocation, even portfolios with little-to-no stock exposure. This strategy can be useful if you are comfortable with the risk statistics provided to you while opening a portfolio and selecting your stock-bond allocation mix. If you decide you do want to invest in the market, consider these options for your money: Stocks: An investment that represents partial ownership of a company. Bonds: An investment in which you lend money to a company for a fixed rate that gets paid to you for a specified period. ETFs: Basket of investments (can be stocks, bonds, or a combination of both) that typically tracks a part of the financial market, called an index. The index can be made up of the largest companies in the U.S., such as the S&P 500. When you open an investment goal Betterment will recommend a portfolio for you when you deposit, based on your goals. Betterment will also handle the trading and rebalancing for you, so that you don’t have to. 3. How many highs and lows in the market can you stand? Everyone thinks they are an aggressive investor until the market drops: your real risk tolerance is how you feel when your investments drop by 30%. Below are three types of risk tolerance: Conservative: Values preservation of funds; can’t handle any fluctuations. Moderate: Values stability of funds; sees market volatility as a necessary evil. Aggressive: Values growth of the funds, can handle wild fluctuations for the price of growth. 4. How knowledgeable do you want to be about investing? People typically fall into three basic investment styles:  DIY: You put in the time to research, create, and monitor an investment portfolio. Most importantly, you can manage your emotions during up and down markets. Do it for me: You partner with a professional to give you financial advice and manage your portfolio. Do it with me: You tap into experts’ knowledge and research to help you select investments based on your needs. Determining how much you want to be involved with your investments and their performance will help you determine who to partner with (if at all) to help you meet your financial goals. If you fall into this last bucket, Betterment can help you meet your financial goals: as your money grows and your priorities change, Betterment’s advice evolves and helps you stay on track. Don’t forget that the most critical part of investing is getting your finances in order: if you decide to invest to meet your financial goals, having your finances in order means you won't have to cash out your investments to cover unexpected expenses. Use these four questions as a guide to help you choose the best investment strategy for your financial plan.

3 Simple Ways You Could Pay Fewer Taxes If You Have An Investment Account Tax loss harvesting, asset location, and utilizing ETFs instead of mutual funds can eliminate or reduce your tax bill, depending on your situation. Here’s why. If you have investments, you might be paying Uncle Sam more than you need to come tax time. Thankfully, there are three things you can do to help keep more of your money in your own pocket. Many investors may not know these strategies are available, or may have heard about them but do not use them. If while you’re reading this you start to think that these strategies are difficult to implement, you’re not wrong. Before we get started, it’s important to note that when you’re a Betterment customer, we can do these things for you (all you have to do is opt-in through your account). Now, onto the good stuff: Let’s demystify these three powerful strategies. 1. Tax loss harvest. Tax loss harvesting can lower your tax bill by “harvesting” investment losses for tax reporting purposes while keeping you fully invested. When selling an investment that has increased in value, you will owe taxes on the gains, known as capital gains tax. Fortunately, the tax code considers your gains and losses across all your investments together when assessing capital gains tax, which means that any losses (even in other investments) will reduce your gains and your tax bill. In fact, if losses outpace gains in a tax year you can eliminate your capital gains bill entirely. Any losses leftover can be used to reduce your taxable income by up to $3,000. Finally, any losses not used in the current tax year can be carried over indefinitely to reduce capital gains and taxable income in subsequent years. How do I do it? For example, sell Coke, buy Pepsi. When an investment drops below its initial value—something that is very likely to happen to even the best investment at some point during your investment horizon—you sell that investment to realize a loss for tax purposes and buy a related investment to maintain your market exposure. Ideally, you would buy back the same investment you just sold. After all, you still think it's a good investment. However, IRS rules prevent you from recognizing the tax loss if you buy back the same investment within 30 days of the sale. So, in order to keep your overall investment exposure, you buy a related but different investment. Think of selling Coke stock and then buying Pepsi stock. Here’s an example of tax loss harvesting: Overall, tax loss harvesting can help lower your tax bill by recognizing losses while keeping your overall market exposure. At Betterment, all you have to do is see if it’s right for you and turn on Tax Loss Harvesting+ in your account. 2. Asset locate. Asset location is a strategy where you put your most tax-inefficient investments (usually bonds) into a tax-efficient account (IRA or 401k) while maintaining your overall portfolio mix. For example, an investor may be saving for retirement in both an IRA and taxable account and has an overall portfolio mix of 60% stocks and 40% bonds. Instead of holding a 60/40 mix in both accounts, an investor using an asset location strategy would put tax-inefficient bonds in the IRA and put more tax-efficient stocks in the taxable account. In doing so, interest income from bonds, which is normally treated as ordinary income and subject to a higher tax rate, is shielded from taxes in the IRA. Meanwhile, qualified dividends from stocks in the taxable account are taxed at a lower rate. The entire portfolio still maintains the 60/40 mix, but the underlying accounts have moved assets between each other to lower the portfolio’s tax burden. Asset location in action.   3. Use ETFs instead of mutual funds. Have you ever paid capital gain taxes on a mutual fund that was down over the year? This frustrating situation happens when the fund sells investments inside the fund for a gain, even if the overall fund lost value. IRS rules mandate that the tax on these gains is passed through to the end investor, you. While the same rule applies to exchange traded funds (ETFs), the ETF fund structure makes such tax bills much less likely. In fact, most of the largest stock ETFs have not passed through any capital gains in over 10 years. In most cases, you can find ETFs with investment strategies that are similar or identical to a mutual fund, often with lower fees. Following these three strategies can help eliminate or reduce your tax bill, depending on your situation. At Betterment, we’ve automated these and other tax strategies, which means tax loss harvesting and asset location are as easy as clicking a button to enable it. We do the work, and your wallet can stay a little fuller. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

What the Ultimate Betterment User Looks Like We're going to break down how to get the most value out of the goal-based money manager Betterment is designed to be. We’ve built Betterment to offer immediate value no matter why you came to us—whether for just an IRA or Checking, or everything we offer. Still, customers often ask us, “how do I get the most value from my money?” What are the “pros” doing with their accounts? What does a complete Betterment user account look like? Today, we’re going to break down a full answer to all those questions, showing you a glimpse of what the ultimate Betterment user looks like. Tax Loss Harvesting+ is automatic, but must be turned on within your account. To start with, let’s review the fundamentals of Betterment today. Since our release of Betterment Checking early in 2020, Betterment has been set up to mirror the four major aspects of a person’s financial life: Spending, Saving, Investing, and Retirement. While we’ll dive into each of those aspects later, the first thing to know is that an ultimate Betterment user leverages all four of these offerings at Betterment. That's where our magic happens: You have a full picture of your financial goals in a single place and we help you achieve that reality with our automated optimization techniques and low fees. The first step to Ultimate: Embrace savings goals. What’s the difference between most users and the “ultimate Betterment user”? Fully adopting the idea of goal-based saving and investing. Every new Betterment user starts by answering questions about what they’re trying to do. Are you trying to save for a car? Do you want to invest for retirement? Our aim is to get you thinking about what you want in life—your financial goals. The users who are likely to get the most value from Betterment adopt a wholly goal-focused mindset. They think, “What are the major things I want in life?” And they add those things as goals in the Betterment platform—with all the trappings of a well-defined goal: specific dates, target amounts, a thoughtful name. Here’s an example of what it looks like to become goal-focused. Take those future life decisions that will cost you (that are expensive enough that they might be financially stressful if you don’t save for them ahead of time) and turn them into clear, concrete savings goals that you can get on track to achieve. Keep planning with short-term cash goals and long-term investment goals. The ultimate user won’t have just one vague goal, they will have as many goals as they feel they need for their life. Some people start with the longest term, largest goals, like retirement, and work back to the present. Others like to think about what major purchases they’re looking to make in the next few years, and work toward the deeper future. Whatever your style, you want to get it all set up. If you’re a couple, you should probably do this together. Goals are also helpful because they help you decide how to invest. For the short-term goals in life (money you plan on spending in a year or less), you can save into our yield-earning FDIC-insured goals (i.e you’ll earn interest). For the longer-term goals (those of a year or more), we’ll advise you on a portfolio allocation that adjusts from riskier to more conservative, the closer the goal gets. For the in-between goals, you can make choices based on how you plan to spend your money. What does this look like? Take a peek at just how comprehensive and well thought out your goal-setting can get... Next, stretch your savings potential by auto-saving as you earn. Ultimate Betterment users don’t just set goals; they fund them out of every paycheck to automate their savings habits and keep their goals on track. Preemptively saving for something concrete can help make it easier to resist spending away your hard-earned money. Plus, auto-deposits ensure you invest as you earn, rather than becoming tempted to try and time the market (a task that even the professionals often fail to do well). Take it up a notch by using Checking to spur even more saving. Here’s where top-notch Betterment users really start standing out from others. They don’t just use auto-deposits to save; they minimize the extra cash they might normally spend away using the full power of Betterment’s spending and saving technology. Lean into complexity where it matters: Your retirement goal. Retirement is the longest-term goal most users set with Betterment. It’s also the most complex. Your retirement plan at Betterment can house multiple accounts types and external holdings, forecast how much you need to save based on the income you’ll want to withdraw, and manage your Betterment-held retirement accounts with Tax Coordination, which shelters some investment types from taxes. The most complete Betterment users let our technology advise them on how to save for retirement (e.g. which IRA type to use) while taking on the hard work of bringing their retirement savings into the goal itself. That can mean syncing an existing 401(k) plan, rolling old 401(k)s into an IRA, or moving outside IRA dollars into Betterment. The idyllic retirement goal at Betterment is holistic but straightforward: a single goal with a unified investment portfolio managed across account types. Tax Coordination (also known as asset location) moves more highly taxed assets into tax-advantaged accounts and lower-taxed assets into non-tax-sheltered accounts. Underlying IRA account rules offer tax-free growth, and where assets live outside of Betterment (but synced), they’re taken into account for determining how close you are to reaching your retirement goal. Beyond saving: Turn on investment optimizations. The key to financial success is saving. Once saving is well underway, the optimizing gets interesting. Especially for retirement goals and other long-term investment goals, users can try one of several maneuvers Betterment can help you handle: tax loss harvesting, charitable giving, and personalized portfolio strategy choices. Taking advantage of our automated Tax Loss Harvesting+ (TLH+) is as easy as switching it on with our app. It applies to all goals in personal and joint taxable accounts. Betterment recommends TLH+ to individuals that make more than $40,000 in annual income and married users who make more than $80,000 and file their taxes jointly. When long-term investments realize taxable capital gains, we let you give them away to charity, enabling you to claim a double tax benefit. For any goal, users can optimize their accounts for their views and preferences with portfolio options beyond just Betterment’s core recommendation. These options include Socially Responsible Investing or even designing your own “Flexible Portfolio” using our preset building blocks. Across strategies, Betterment has over 300 portfolio allocation targets you can choose from. Ultimately, we want Betterment users to feel the value of using technology to make their financial lives easier. From supporting your spending needs with Checking to helping you set up goals and invest for them effectively, we at Betterment know the best way to help people do what’s best for their money is to enable their full financial lives. Our biggest fans get this. Use Checking, Cash Reserve, Investing and Retirement together to initiate strong goal-based savings habits, reinforce them with automation and easy transfers, and optimize the rest of the way. That’s what the future of money management looks like. That’s the magic we work to create at Betterment. If you haven't start with Betterment, get started.

The Benefits of Rolling Over Your 401(k) or 403(b) into an IRA Rolling over an old employer-sponsored retirement plan into an IRA can be highly beneficial. Here are three reasons to consider rolling over a 401(k) or 403(b). It might be easy to forget about 401(k)s from past employers, but you'll pay for it in the long run. Here are some reasons to consider rolling them over into one IRA. When you’ve switched jobs multiple times in your career, you may have participated in several employer-sponsored retirement plans, such as 401(k) and 403(b) plans. 401(k)s are generally provided by many for-profit employers, while 403(b) plans are most often used by the nonprofit sector. What many people don’t know is that when you leave a job, it’s important to consider carefully what you do next with your employer-sponsored plan. While working, one of the best ways to save for retirement is to fund an employer-offered plan because they often have important tax advantages and higher contribution limits than individual retirement accounts. But after you leave a job, there are several important reasons to consider rolling over funds from your 401(k) or 403(b). In this article, we’ll run through some of those reasons. 1. Accessing more investment options One of the main benefits of an IRA is that there are often more investment options than a 401(k) or 403(b) plan. If you contribute to your employer’s retirement plan, you might end up with only a few options chosen by the plan administrator. You might have to be heavily invested in company stock or you might have a limited number of high cost mutual funds to choose from. We don’t bring this up as a way of lambasting your administrator—they're simply trying to pick the options they believe should be made available to all employees—but many people don’t realize just how limiting these options can be. If you have an account with a previous employer, you may not have any worthwhile reasons to stay with the limited investment choices within the plan, and that’s one reason to consider rolling into an IRA. An IRA held at a brokerage or investment advisor, like Betterment, enables you to access a much broader universe of funds. For some investors, having the ability to pick and choose any variety of funds is important to them. At Betterment, our investment advice for an IRA (and any account type) is based on research-backed portfolio construction that pursues a high expected return for the risk you’re willing to take on, while maintaining global diversification and low costs. 2. Lowering Your Investment Fees The fees with an IRA can sometimes be lower than what is charged by your plan administrator. In many 401(k) and 403(b) plans, the expense ratios (i.e. fees) on mutual funds and ETFs can be much higher than those available within IRAs. Also, depending on your plan, by keeping funds within your 401(k) plan after leaving your employer, you may be subject to management fees. Moving to an IRA may involve taking on fees for investment advice and management or trading costs, but all-in, when you do the cost analysis, an IRA can often be less expensive than a 401(k) plan. When evaluating fees, do keep in mind, that if your current employer-sponsored plan is among the nation’s top plans, it could also be worth your while to hold your funds there. 3. Managing Your Portfolio in One Place For many investors, part of the value of rolling over to an IRA comes from the peace of mind of having all of their past retirement contributions (and other investments) in one place, rather than spread out across multiple old employer-sponsored plans and investment providers. When you understand the full picture of your retirement savings, you can often make better estimates of what your future retirement budget could look like. Furthermore, depending on your situation, if you move your retirement assets to one provider, you can also improve the tax-efficiency of your taxable investments using asset location. You can learn more about how Betterment’s Tax Coordination of IRAs and taxable accounts helps increase potential after-tax returns here. Roll over correctly, and you probably won’t need to worry about taxes. Even with the above benefits of rolling over, many people hesitate on the fear of causing themselves extra taxes. The good news is that when rolling over a 401(k)/403(b) or any other employer sponsored plan, we use the direct rollover method to prevent any withholding or negative tax consequences. There are two important things to remember in regards to taxes when rolling over: Be sure to designate a withdrawal from your current provider as a rollover. A rollover from a traditional 401(k) or 403(b) should enter a traditional IRA. A rollover from a Roth 401(k) or 403(b), should end up in a Roth IRA. If you withdraw from a traditional 401(k) or 403(b) as a non-rollover before age 59 ½, you will face a 10% penalty for an early withdrawal. If you rollover from a traditional plan into a Roth IRA, you will have to pay income taxes on the money. Both of these situations are unnecessary for most investors, except in certain circumstances. The key is that when deciding whether to rollover a retirement account, you should carefully consider your personal situation and preferences. In this article, we’ve provided three general reasons to consider rolling over to an IRA, but as an individual investor, your situation is unique. This article is not an individualized recommendation that you take any particular action—just useful information for you to think about. As suggested above, there are a variety of factors to consider when evaluating the choice to make a rollover. In addition to the points above, you might want to consider: The investment options you have access to The current and future fees and expenses you face The investment services you need (and could gain or lose) Any penalties you could face when withdrawing your money Protections from creditors and legal judgments Required minimum distributions associated with certain accounts The treatment of employer stock within your employer plan The world of retirement planning is complicated, no doubt about that. So, before deciding to roll over an employer-sponsored plan, you should research the details of your current account and consult tax professionals and other advisors with any questions about your specific personal situation.  

Here’s How Other Millennials Are Saving For Retirement Our research indicates that the majority of millennials and Gen Z are saving for retirement, and shows how much they’re saving.

Video: How Can Tax Loss Harvesting Help? Tax loss harvesting (TLH) can be a silver lining in bad markets. In this video, Dan Egan, explains how it works at Betterment.  

What Should I Be Doing With My 401(k)? With the spread of COVID-19 and recent market volatility, it’s natural to wonder what you should do with your 401(k). With the spread of COVID-19 and recent market volatility, it’s natural to wonder what you should do with your 401(k). Betterment is here to help you navigate your financial life and work toward your retirement goals—whether the market is up or down. You can even join us for a live webinar on April 8. While everyone’s situation is different, we’ve put together some guidance based on common scenarios. Please consult a financial advisor, such as one of our CERTIFIED FINANCIAL PLANNERS™, to develop a specific course of action. What if I’m in a stable financial position? If you feel stable and have a fully funded emergency fund, we strongly recommend that you continue saving in your 401(k) plan. For most people, retirement is years, if not decades, away. And even if you’re approaching retirement, you’ll be spending down your savings for years. Make sure your retirement plan reflects your preferences and current situation. Consider increasing your contributions so that you have more time in the market. What if I don’t have an emergency fund? An emergency fund (or “safety net”) is a foundation of financial security built for times just like this. It’s better if you can save without altering your 401(k) contributions. If that’s not possible or will take too long, it’s okay to temporarily redirect some of your savings toward one. Create a Safety Net goal or Cash Reserve within your Betterment account. Save an amount equal to 3–6 months of expenses as quickly as you can. Once achieved, be sure to turn your 401(k) contributions back on. What if money is tight right now? We know times are hard for many people. First, we recommend looking for ways to cut back on non-essential spending. Little purchases can add up fast, and it’s better to give up a little now and continue the habit of saving. Additional steps: Check for temporary relief, including stimulus checks, student loan pauses, and mortgage breaks. If you expect a tax refund, file your taxes as soon as possible. If you have an emergency fund, consider using it. What if I need to use my retirement funds? If you have no emergency fund (or have used it all) and need money now, you may consider tapping into retirement accounts as a last resort. Fortunately, there’s a new Coronavirus-Related Distribution (CRD) that your plan may allow. This means you can: Access up to $100,000 from your account, with no withholding and no 10% early distribution penalty. Spread the income (and any income tax owed) over three years; but if you repay the distribution within 3 years, you won’t owe taxes. The CRD’s flexibility means it’s likely more beneficial than a 401(k) loan. That said, if your plan allows loans, you may be able to benefit from relaxed loan requirements, such as higher loan amounts and deferred repayments. Please contact your employer to determine if either of these options is available through your plan. What should I do if I’ve been furloughed or laid off? If you’ve been furloughed, you are technically still employed, so you can likely take steps outlined above. If you’ve been laid off, you have additional 401(k) considerations. Even if you can keep your 401(k) in your current employer’s plan, you may find that rolling over to an IRA provides you with additional flexibility. For example, you’re permitted to take a CRD from your IRA, just like the 401(k) CRD, which is a penalty-free withdrawal and can be repaid to avoid taxes altogether. Rolling over to a Betterment IRA means you can continue to take advantage of the same investment advice and platform features you had with your 401(k).

Our Portfolio Is Built To Withstand Market Drops While we don’t know when exactly a market drop will happen, we’ve already prepared for it. We’ve recently seen a sizable drop—or in other words, a drawdown—in the stock market. In fact, it’s large enough to push U.S. equity markets into the first bear market in over ten years. While the last decade has been generally great for investors, there have been a few bumps along the way—like in 2018, when the Dow and S&P 500 both experienced the worst performance during the month of December since 1931. Seeing your investments lose value can cause feelings of fear or concern, but it’s important to remember that any long-term investor is going to see short-term losses at some point in time. There Will Always Be Ups And Downs Even in a good year, your portfolio can experience losses. Let’s take a look at how Betterment’s diversified 75% stock portfolio would have performed over the last sixteen years, assuming the makeup of our current portfolio. The graph below shows the portfolio’s largest drawdown within each year in red, as well as total return for each year in blue. As you can see, even though the portfolio ended the year with positive returns three times as often as it ended with negative returns, it experienced a negative return at some point during every year. Betterment’s 75% Stock Portfolio—Yearly Returns and Largest Drawdowns Source: Returns data from Xignite. Calculations by Betterment. Data ranges from January 1, 2004 to January 1, 2020. The Betterment portfolio historical performance numbers are based on a backtest of the ETFs or indices tracked by each asset class in a Betterment IRA portfolio as of March 2020. Though we have made an effort to closely match performance results shown to that of the Betterment Portfolio over time, these results are entirely the product of a model. Actual client experience could have varied materially. Performance figures assume dividends are reinvested and daily portfolio rebalancing at market closing prices. The returns are net of a 0.25% annual management fee and fund level expenses. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. See additional disclosure here. Despite an average drawdown of 12%, as well as four years with drawdowns greater than 15%, the portfolio had an average yearly return of +8.2%. Even when things looked to be at their worst during the 2008 financial crisis, the portfolio’s largest drawdown was more extreme than the actual ending loss for that year. We Designed Our Portfolios With Drawdowns In Mind Betterment has over 100 portfolios to choose from—but don’t worry, we’ll recommend the right level of risk for each investing goal that you set up. Our recommendations consider both the amount of time you’ll be investing for, as well as the possibility that you could experience market drawdowns during that time frame. For goals with a longer time horizon, we advise that you hold a larger portion of your portfolio in stocks. A portfolio with more stocks is more likely to experience losses in the short-term, but is also more likely to generate greater long-term gains. For shorter-term goals, we recommended a lower stock allocation. This helps to avoid large drops in your balance right before you plan to use what you’ve saved. As your goal’s end date gets closer, we recommend that you reduce your risk -- we can also do it for you -- which helps to reduce the chance that your balance will drastically fall if the market drops. Below, we show the performance of three Betterment portfolios at different risk levels—90% stocks, 50% stocks, and 10% stocks. First, we look at the returns over a shorter period, a year-to-date snapshot ending March 17, 2020. Stock markets have experienced a significant drawdown to start 2020, and as expected, the lower risk (10% stock) portfolio had a smaller drawdown than the higher risk portfolios during this period. Betterment Portfolio Returns at Different Risk Levels (Jan 1, 2020 - March 17, 2020) Source: Returns data from Xignite. Calculations by Betterment. Data ranges from January 1, 2020 to March 17, 2020. The Betterment portfolio historical performance numbers are based on a backtest of the ETFs or indices tracked by each asset class in a Betterment IRA portfolio as of March 2020. Though we have made an effort to closely match performance results shown to that of the Betterment Portfolio over time, these results are entirely the product of a model. Actual client experience could have varied materially. Performance figures assume dividends are reinvested and daily portfolio rebalancing at market closing prices. The returns are net of a 0.25% annual management fee and fund level expenses. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. See additional disclosure here. Next we look at the returns of our portfolios from the beginning of 2004 to March 17, 2020. As you might expect, the higher risk 90% stock portfolio grows faster than the 10% stock portfolio. It also experiences larger and longer periods of negative returns. Betterment Portfolio Returns at Different Risk Levels (Jan 1, 2004 - March 17, 2020) Source: Returns data from Xignite. Calculations by Betterment. Data ranges from January 1, 2004 to March 17, 2020. The Betterment portfolio historical performance numbers are based on a backtest of the ETFs or indices tracked by each asset class in a Betterment IRA portfolio as of March 2020. Though we have made an effort to closely match performance results shown to that of the Betterment Portfolio over time, these results are entirely the product of a model. Actual client experience could have varied materially. Performance figures assume dividends are reinvested and daily portfolio rebalancing at market closing prices. The returns are net of a 0.25% annual management fee and fund level expenses. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. See additional disclosure here. If you were to focus on a short time frame—such as the beginning of 2020—you might be tempted to think that the 10% stock allocation is a better investment than the 50% or the 90% portfolios. But, when you consider a longer time window, it’s clear that the 10% portfolio lacks the potential for the greater returns that are seen in the portfolios with higher risk. You Can Reach Your Goals Despite Market Drops The path to investment growth can be bumpy, and negative returns are bound to make an investor feel uncertain. But, staying disciplined and sticking to your plan can pay off. Let’s consider a hypothetical 30 year old customer who started a Retirement goal in 2004 with an initial balance of $10,000 and ongoing monthly auto-deposits of $350. Below, we show the goal’s projected growth alongside the actual daily balance that the customer would have had over the 16-year period. Leading into 2008, the Retirement goal would have performed better than the median projected outcome, but due to the financial crisis in 2008, the balance would have fallen by as much as 45%. Retirement Goal—Projected vs. Actual Balance Source: Returns data from Xignite. Calculations by Betterment. Data ranges from January 1, 2004 to March 17, 2020. The Betterment portfolio historical performance numbers are based on a backtest of the ETFs or indices tracked by each asset class in a Betterment IRA portfolio as of March 2020. Though we have made an effort to closely match performance results shown to that of the Betterment Portfolio over time, these results are entirely the product of a model. Actual client experience could have varied materially. Performance figures assume dividends are reinvested and daily portfolio rebalancing at market closing prices. The returns are net of a 0.25% annual management fee and fund level expenses. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. See additional disclosure here. The goal projections are for a 30 year old’s Retirement goal on January 1st 2004 with a starting balance of $10,000 and a monthly deposit of $350. The monthly deposit is applied on the first of each month. The goal has a target allocation of 90% for the duration of the time period considered. The average projected balance is derived from the median projected outcome. This hypothetical investor would likely have felt concerned about their portfolio falling below our average projected outcome—and that’s understandable. But, because they continued making their monthly auto-deposits and markets eventually bounced back, the investor would have also come to see their balance grow right back in line with our projections. The most recent market drop brings the balance below our average projected outcome, but remains within our projected range of returns. We’ve seen from previous market drops that sticking to an investment plan has paid off. Hopefully, this historical context may provide some reassurance to investors who stay the course and wait for their balances to bounce back over time. Our Advice: Focus On The Future A sudden drop in the stock market, like the one we’re experiencing now, typically comes with frightening news headlines and panic amongst investors. While some feeling of angst is perfectly normal, it’s important to remember that a temporary slow down in the markets doesn’t mean that they’ll continue to fall forever. If you need some help zooming out, remember that bad markets bring productive opportunities to tax-loss harvest, move your investments with less tax consequences, or make a one-time deposit to help rebalance your portfolio. We are working hard to push you closer to achieving your goals both when markets are up and when markets are down.

How to Get the Most Impact Out of Your Charitable Donations This holiday season, use Betterment and Agora to make sure your money is having as much impact as it could. How do you want to change the world? No matter the cause you care about, being an effective donor means supporting the nonprofits that have the potential to achieve the most good. However, giving wisely can be tricky. Most of us make decisions using the information we have: a good friend’s recommendation, a convincing website, a well-planned fundraiser. The market is dominated by a small number of nonprofits with large marketing budgets. Roughly 5% of charities in the United States spend more than 86% of all charitable dollars each year. This concentration often leaves out smaller, potentially more innovative charities, and makes it difficult to evaluate real impact. This holiday season, take the steps to make sure your money is having as much impact as it could. How to Maximize Social Returns The first step in identifying the most effective nonprofits is to ignore rough proxies for impact, such as “overhead ratios.” An overhead ratio is the portion spent on management and general operating expenses compared to intervention expenses. Contrary to what you might think, low overhead ratios don’t necessarily indicate effectiveness, because quality management teams may require high overhead for research or to launch new programs. As a simple example, say you want to reduce New York City poverty by funding an after-school program. Program A has an overhead ratio of 10%. Program B has an overhead ratio of 20%. Which actually does the most good per dollar donated? What you really want to know is, per dollar, how many kids are taught and supported in a high quality way? Understanding the impact of your dollar—students taught, lives saved—requires more nuanced research than high-level metrics. Figuring out impact, however, gets complicated fast. The 30 largest foundations spend $3 billion on research and administration of grants, according to research and analysis done by Agora for Good, a platform that allows donors to build and manage virtual foundations with the support of expert guidance. As in investing, specific knowledge is key to appropriately evaluating a nonprofit’s performance. Platforms like Agora for Good help donors navigate this process by providing recommendations on highly effective nonprofits through partnerships with industry experts in each sector—health, education, and environmental protection. Want to address clean water, for example? Find vetted organizations that bring clean water to those in need for just $1 a year. Agora’s mission is that each dollar donated by an individual—from you, your friends in finance, your grandma—is as high impact as a dollar donated by the most well-informed, wealthy philanthropist. You can donate wisely through three simple steps. 1. Develop your giving strategy. Giving, like investing, works best when you proactively develop a strategy based on your vision and goals. Try not to only be reactive to requests for contributions; instead, start by envisioning your ideal world and the causes that would help us get there. With Betterment’s charitable giving service, having a strategy helps you take advantage of giving appreciated shares, which can help you earn certain tax advantages. Even if you just plan to give cash, developing a giving strategy can help you maximize your impact. 2. Optimize your donation amount for taxes. With a strategy in place, you can align your giving with your own potential tax advantages. Most charitable gifts can be deducted on your tax return if you itemize your deductions. Currently, individuals in the United States give just about 3% of their adjusted gross income (AGI). If you give appreciated shares with Betterment’s charitable giving tool, you will also avoid capital gains taxes on those shares. If you strategize well, you can effectively help free up more money when you give from decreasing your tax liability, which in turn helps you give more later. 3. Build your giving portfolio. Think of your donations as you would the money you use to invest. This means using a portfolio approach that lets you select the types of interventions you want to fund, and build a basket of investments. Platforms like Agora for Good can help by creating a single portal to manage, contribute, track your gifts. Here’s the truth: If you are a smart investor, you can—and should—be a smart donor. And with Betterment’s solution for giving shares, you can make your donations as tax-optimized as possible. Learn more about Betterment’s charitable giving tool.

Where in the World Are You Invested? Betterment's portfolio diversification includes holdings across 102 countries. Consider where your money is invested. One of the fundamentals of good investing is good diversification. But it's hard to do well. Here at Betterment we have done that work for you—every customer can easily invest in a globally diversified portfolio of up to 12 ETFs. We picked those 12 ETFs based on careful consideration. For the bond basket, we needed to balance domestic and international interest rate risk and credit risk; and for our stock basket, we needed an appropriate mix of sectors, countries, and capitalization factors. The result is that our customers can access a portfolio that is invested in 102 countries and in more than 5,000 publicly traded companies across the world—along with exposure to government debt, corporate bonds, securitized debt, and supranational bonds with a range of creditors and interest rate sensitivities.1 Why go global? As we mentioned above, it's hard to diversify well. One problem for do-it-yourself investors is that they tend to home-bias their portfolios. They prefer to invest in companies they are comfortable with—because they know them, or they are close to home. Unfortunately, that means they are less diversified than they should be, and expected performance may suffer. Betterment’s portfolio avoids this home bias by reflecting global stock market weights. U.S. stock markets make up about 48% of the world's investable stock market–the remainder is international developed (43%) and emerging markets (9%). You can see this on the fact sheet for the MSCI All-Country World Index. By using the world's markets as its baseline, the Betterment portfolio diversifies risk on a number of levels including currency, interest rates, credit risk, monetary policy, and economic growth country by country. Even as economic circumstances may drag down one nation, global diversification decreases the risk that one geographic area alone will drag down your portfolio. To diversify risk When we selected our bond basket components, we considered which factors affect bond returns—interest rates risk and credit risk. Then we selected funds that would diversify those risks. For example, with high-quality domestic U.S. bonds, the risk comes from a potential rise in interest rates, which will cause a fall in value for longer-dated bonds. To diversify away from this specific U.S. interest rate risk,  we picked another bond asset with low correlation—in this case, high-quality international bonds. The particular fund we used, BNDX, hedges out all currency risk; and includes bonds from stable international governments and international issuers, each of which have their own interest rate risk and credit risk. We also invested a smaller proportion in dollar-denominated emerging market bonds. These tend to have much higher coupons (4.9% at time of publication), but also more volatility in price, as they have a higher exposure to credit risk from international issuers. To capture growth Among our various stock basket components, we include international stocks in order to benefit from growth overseas in developed markets, including the U.K., Japan, Germany, France, Australia, and Switzerland. This helps our portfolio maintain similar expected returns as more concentrated domestic portfolios, but with lower risk. Then with the emerging markets stock component (VWO), we can capture growth in small but expanding markets such as Brazil, India, and China. This further diversifies our portfolio, and should boost expected returns, particularly at higher risk allocations. 1 The portfolio invests in 102 countries at all but 100% bonds and 100% stocks.

How To Avoid Money Fights If you’re like most people, you probably don’t look forward to talking about finances with your partner. Here’s one piece of advice you can start using today. Couples in healthy marriages are twice as likely to discuss money dreams together. But, discussing money can be difficult, which is why so many couples avoid it entirely. How can you start to have productive, healthy conversations with your significant other? Answer: a monthly financial check-in.  Below are tips on how to do it right, and why it works. What’s a monthly financial check-in? A monthly financial check-in is time set aside for you and your partner to talk openly about any financial topics you want. It’s an opportunity to look back on the previous month and to plan ahead for the next month. There are no strict rules on what you can and can’t discuss, as long as it’s money-related. Some common examples might be: Upcoming large expenses: Coachella, friends coming to town, or a wedding. Financial goals: Buying a home, saving for college, or retirement. Important tasks: Updating your W-4, opening a new credit card, or combining your finances in a joint cash account. Why monthly check-ins work so well. The key is balance. You want to talk about money, but it’s not healthy to have it creep into every conversation. A recurring monthly check-in solves both these problems. Some people don’t like talking about finances at all. A monthly check-in gives you a safe space to start the conversation. Other people think and talk about money all the time, which can be draining on a partner. Unless the matter is urgent, you can make a note and wait to bring it up until the next monthly check-in. 3 Tips To Make Them Effective Choose a fun location: Try a new coffee shop or head to your favorite sandwich spot. Finance isn’t always fun, so tying your monthly check-in to something exciting can help. Set a time limit: Don’t let your monthly check-ins drag on for too long. Talking money can be mentally draining, so try limiting your check-ins between 30 and 60 minutes. Avoid placing blame: For example, if your partner went over budget last month, don’t berate them. Instead, discuss how you can plan better next month. Being smart with money is hard enough on its own. Don’t make it harder by adding relationship stress to the mix. If one of your next financial discussions involves which joint account you should park your short-term cash at, consider opening a  joint Cash Reserve account. Start saving for your future together with a cash account that features a variable rate up to 0.75%*, no monthly transaction limits, and FDIC insurance up to $2 million once deposited at our program banks†. It doesn’t get better than this.

Should You Create a Trust Fund? It Could Help You Preserve Wealth Weigh the costs and benefits of establishing a trust as part of your estate planning. For those who have assets to leave as a legacy, a trust can be a strategic part of estate planning. Trust assets can include everything from a life insurance settlement and real estate to investments and cash. However, not all trusts are the same—there are many variations, each with specific benefits and restraints. In the past, establishing a trust was largely viewed as a tool for very high net worth individuals looking to preserve wealth across generations. But these days, easily accessible low-cost investing accounts help us all take advantage of the value that creating a trust can provide for our assets. One of the benefits of trusts is that they can shield assets from lawsuits and probate costs. Many are interested in these benefits regardless of their net worth. With the emergence of automated investing services, like Betterment, setting up and managing a trust account of any size is easier than ever. Selecting the right type of trust for your needs will be something to discuss with an estate planning specialist, such as a financial advisor, accountant, or estate planning attorney.1 However, there are some general benefits that most trusts offer. Below is a summary to help you decide whether a trust may be right for you. Privacy and Protection After an individual’s death, an estate typically goes through probate, where the will is open for public scrutiny and assets may be used to pay off creditors. If assets are held in multiple states (real estate, for example), probate will take place in every state—adding substantial costs to settling an estate. The costs associated with probate could reduce the estate by 3% to 7% on average—and that’s not including additional estate taxes and income taxes that may be due. These additional costs mean significantly less assets are given to the intended beneficiaries. With certain types of trusts, all assets that have been placed in the trust are considered property of that trust, and thus they are off limits to creditors, they’re kept out of public record, and they can avoid probate. Trusts are also a useful way to shield and protect assets for people who are at higher risk of litigation, such as doctors. Placing assets in a trust may also reduce the potential for lawsuits between heirs. Taxes Different types of trusts provide different tax advantages. For example, an irrevocable life insurance trust shelters any life insurance death benefit proceeds from estate taxes. The most popular type of trust is a revocable living trust, which is a trust that can be modified once it is established. It’s created during the grantor’s (the person who funds the trust) lifetime. On its own, a revocable living trust doesn’t provide specific tax benefits, but additional provisions can be added to these trusts to help reduce estate taxes. There are about nine commonly used trust types. Speaking with an estate planner and tax advisor will help you determine how to maximize tax advantages and establish the right type of trust for your needs. Distribution Control Not all beneficiaries need the same thing. A trust can establish guidelines for how and when funds are distributed. Rather than simply naming the person who will inherit your assets, you can add provisions that specify how the trust assets can be used. By adding these provisions to your trust, you can help your assets last longer, since you decrease the risk of a beneficiary draining the account for frivolous expenses. For example, funds might be earmarked for education, for special medical needs, or for distribution only after the beneficiary has reached a certain age. In addition, a trust can ensure—through its guidelines—that money is distributed in a specific way to a specific entity, rather than an individual. This might mean a charity, a religious institution, or your alma mater. Sound Investment Strategy A trustee is the person(s) named in a trust document who is responsible for making decisions regarding the trust. By law, a trustee has a fiduciary responsibility to oversee the funds entrusted to them. Regulation, such as the Uniform Prudent Investor Act, states that a trustee must act “prudently” when administering a trust, which means holding the investments in a sound interest-bearing account, as well as assessing the risk, return, and diversification of assets. Trustees can be an investment firm or an individual. Trustees should ensure trust assets are invested wisely to fulfil the specific aims of the trust.  Automated investment services like Betterment provide trustees with an easy, low-cost way to manage a trust. Consider the Benefits Whether you are looking for asset protection, privacy, tax minimization, control over how your beneficiaries use their inheritance, or a combination of each of these things—establishing and managing a trust has never been easier. After speaking with your estate planning specialist and determining which type of trust is best for you, check out our FAQ on what we offer for trust accounts here at Betterment. 1Note that Betterment is not a tax advisor and nothing in this blog post should be construed as specific advice—please consult a tax advisor regarding your specific circumstances.

What A Trip To The Casino Can Teach You About Investing And Risk Learn the ins and outs of how gambling works from a quantitative investor, and use it to your advantage in investing for the long term. For better or worse, there is a certain thrill involved with gambling that makes otherwise rational individuals make irrational bets. When the Mega Millions jackpot hit $1.6 billion in October 2018, over 370 million tickets were sold—that’s more than one ticket for every person in the United States. Of course, the vast majority of those who bought the tickets knew their chances were slim of winning the jackpot in the end. They probably even realized that, on average, they’d lose money by buying a ticket. What you should know is that gambling is never an effective use of money, and gambling addiction can be a major problem. In this article, we’ll review some ways to think about light gambling, but if you gamble often, we encourage you to talk with an appropriate professional. Even with small-time gambling, it’s important not to wager any more money than you can afford to lose. That said, if you set a reasonable, fixed limit of what you will gamble ahead of time (and stick to it!), an occasional night of gambling in Vegas or an entry into your office Fantasy Football pool can be fun. Of course, it’s even more fun if you win. If you do gamble, here are two things you should keep in mind to help maximize your chances of returning, or exceeding, your stake: know your odds, and size your bets accordingly. Part 1. Knowing Your Gambling Odds One of the important skills to have is knowing exactly what your odds are, and how you can improve them. In a skill-based gambling game, like poker, you can increase your chance of winning with practice, but even games that are completely dependent on luck can have different odds based on strategy. As an extreme example, let’s consider the Mega Millions lottery I mentioned earlier. In this game, players choose five numbers between one and 70, and a sixth number between one and 25. The lottery then draws numbers at random, and players win successively more money based on the amount of correctly matched numbers. Players can win the jackpot if they match all six numbers correctly, and if the jackpot isn’t won at a drawing, the money rolls over to the next drawing. The first thing to note is how miniscule the chance of winning the jackpot is. The total number of possible combinations for the lottery is 302,575,350, meaning you have an eight-times higher chance of flipping two nickels and having them land on their side than to win the jackpot. One strategy that may seem enticing at first is to closely monitor the jackpot and only buy when the value gets very high. Since every ticket costs $2, you could technically buy every combination of numbers for a bit more than $600m, seemingly guaranteeing a profit if the jackpot exceeds that number. However, an important caveat is that the jackpot is split between all winners, and a split jackpot would ruin what seemed like a sure win. Nonetheless, the prospect of a large jackpot is enticing. Using LottoReport.com’s data from the 97 Mega Millions drawings between December 2017 and November 2018, we found a pretty clear relationship between jackpot size and number of tickets sold: Relationship between Mega Millions Jackpot Size and Tickets Sold If we assume that each person randomly chooses the numbers on their ticket, we can pretty easily calculate the odds of a split jackpot (using the same set of data): Mathematical Chance of Winning as Jackpot Increases in Value At a jackpot size of just over $1 billion, it becomes more likely than not that someone will win the grand prize. Somewhat more counterintuitively, the probability that someone else will win the jackpot given that you also won the jackpot is about the same, i.e. around 50% if the jackpot is over $1 billion. This means that there is probably some “sweet spot” in which the jackpot is small enough that not as many people decide to buy tickets, but still large enough to maximize your possible returns. Part 2. Sizing Your Bets The second skill you should have is to know how to size your bets. Even with great odds, most people place odds that are too conservative, hampering their potential winnings, or too aggressive, increasing their risk of losing money. In one study from 2016, participants were given $25 and were allowed to bet on a biased coin that had a 60% chance of landing on heads. Even though the participants were given even odds and the probability of winning was high—i.e. the game was stacked in their favor—the majority of the participants performed suboptimally, with 30% of them going bust within 30 minutes. Their mistake was unsound bet sizing. You can view bet sizing as a spectrum of risk-seeking behavior, where we have the most conservative option at one end—don’t bet at all, no matter how good the odds are—and the most aggressive on the other—bet the farm (or better yet, mortgage the farm and bet that money too!) on any gamble, no matter how long the odds are. Mathematically, both of these behaviors are well below optimal if you want to maximize your betting winnings, and the optimal strategy exists somewhere between the two. The optimal bet-sizing strategy is a matter of math. John Kelly found the optimal solution in 1956 for how to size your bets if you want to increase your wealth optimally in the long-run. The so-called “Kelly Criterion” can be described in a short formula. Then, we can test out the formula with simulations of what individuals’ gambling circumstances might actually be like. What we’ll find at the end is exactly what casinos already know well—that typically the best gambling strategy is to only gamble a small amount of your wealth, while diversifying your bets. Using the Kelly Criterion The mathematical formula for the Kelly Criterion is: f = (pb – q) ÷ b where f is the fraction of your bankroll that you should bet, p is your chance of winning, q is your chance of losing (i.e., 1 – p), and b are your net odds, i.e. the amount of money you would win by betting $1 and winning. For example, in the biased coin study described earlier, the participants should have bet (60% x $1 – 40%) / $1, which equals 20% of their bankroll. The participant who follows this strategy could expect their wealth to grow by 2% per bet, on average. Simulating Possible Outcomes We can test this out by running a Monte-Carlo simulation, in which we simulate a strategy thousands of times to estimate the efficiency of a strategy. Assuming that each player can play 300 games in the 30 minutes allotted to them, and that the players’ “wealth” is capped at $250, how well do the players do if they follow the optimal bet sizing strategy? Let’s simulate the results for one player first: This player had a very volatile and bumpy start, but by following the Kelly Criterion they managed to maximize their wealth after a bit less than 100 coin tosses. Let’s see what happens when we simulate the wealth of 10,000 people: When we look at the summary results above, things look very rosy. Over 90% of players end up maxing out their wealth, and no-one went broke when they followed the Kelly Criterion. However, what is missing from this chart (compared to the previous figure) is the amount of volatility in the results. If you look back at the single individual, you can see just how volatile their wins and losses were. At any point, a bad run of three tails in a row would cut your wealth in half. This sort of drawdown is a rare event in stock markets and can make even the steadiest investor question their strategy, but we would expect a 50% drawdown to happen over 19 times if we played the coin-toss game 300 times as we posited earlier. Casinos Play Optimally and Pool Money to Help Reduce Likelihood of Losses While playing optimally—if emotion wasn’t part of the game—might help lead to better results, it can’t solve for the volatility in wins and losses. And yet, that’s what most players want: to win and keep on winning. Maybe you could pool your money with many other players and share your collective winnings in order to reduce your likelihood of losing… Congratulations, you just invented the casino! Positive expected returns and small bet sizing are exactly what allows a casino to reduce their risk and maximize returns, and why you see casinos impose maximum limits on bet sizes, even if the odds are in their favor. Outsmart average. Be more like the casino with your investments. When thinking of gambling, everyone wants to be James Bond—calmly going all-in on what seems like an impossible hand, and then winning with a royal flush in the end. But for each James Bond, there are thousands of gamblers losing their money in games specifically designed to be stacked against them. What’s really cool is to be the casino. Strict regulations and the astronomical amounts of cash needed to create your own casino makes it a hard business to crack in to, but what you can do is implement some of the factors that help make casinos successful into your own investment moves: 1. Diversify your bets. Casinos never bet all their cash on one horse. Similarly, you can improve your investment returns by diversifying your investments across different asset classes and geographic markets. 2. Play the odds. A casino will never enter into a bet in which they expect to lose money. Most individuals would probably say they behave the same way, and yet millions of Americans keep significant portions of their cash in checking or savings accounts with yields far below the current inflation rate, almost guaranteeing that they’ll lose money in real terms. If you don’t want to invest, help maximize your cash by putting it to work in a cash account, like Cash Reserve. 3. Turn Your Losses into Wins A small consolation if you lose at the gambling table is that your losses are tax-deductible, up to the extent of your other gambling winnings. You can do even better, however, by harvesting and deducting your investment losses, while still retaining the potential for investment upside.

How Much Are You Losing To Idle Cash? Uninvested cash may feel more readily available compared to when it's invested, but there can be better ways to manage your funds. Find out how. So far, we’ve told you about the consequences of having uninvested cash in your investment portfolio. But cash is king, and so even the most savvy investors still keep money in places like checkings and savings accounts in order to have easy access to those funds, which then can be used for day-to-day expenses. Here at Betterment, we want you to do better. What Is “Idle Cash”? Idle cash is money that is not invested in anything and is therefore not earning investment income. It’s money that is not actually participating in the economy-- not being spent on anything and not increasing in value. Therefore, it can’t earn you anything. Ultimately, keeping idle cash on hand is simply not as beneficial as you may think. In fact, these funds are frequently considered wasted, as they typically cannot keep up with the effects of inflation. In the U.S., the inflation rate that the Federal Reserve targets is 2% annually-- given that your idle cash likely does not increase in value, its purchasing power actually decreases as time passes. That’s right—uninvested funds gradually lose value, since they are unable to keep up with the rate of inflation, which means that as time goes on, the $100 under your mattress can eventually only buy $98 worth of things, then $96, then $94, and so on. And that’s just inflation—the opportunity cost of keeping cash that you otherwise could invest in the market is even worse. Why do people keep uninvested cash? Despite the fact that keeping idle cash can be detrimental to a successful, long term savings plan, there are still plenty of reasons for people to keep cash on hand. Accessibility and liquidity are huge factors—investors want to be able to pay their bills from their checking accounts with the click of a button, for example—as is safety and security, and the fact that savings accounts from member banks are FDIC-insured. The current reality is that among the checking and saving accounts out there, the return on deposited funds is very low. In fact, the FDIC announced that as of February, the average yield on a savings account is 0.09% APY—in a 2% inflation environment, this is still a purchasing power losing investment. The yield on checking accounts is even worse—most of these products have very low interest rates. How much uninvested cash can I get away with keeping? While a small portion of uninvested cash may seem insignificant, it can be disadvantageous for at least two reasons: Preventing it from keeping up with inflation rates means your cash loses value over time, and You fail to benefit from money that can compound over time and garner even higher returns. Typically you shouldn't reinvest cash if it costs you more to actually invest it than what you would earn, due to, for example, broker commissions. However, at Betterment, the absence of trading commissions, as well as our ability to support fractional shares, help ensure that every last cent of your cash is being put to work for you. If we assume an average trading cost of $7 per trade (typical of discount brokerages) and you don’t want to reduce your returns by more than 1%, then you should have, at most, $700 of cash. Even though we recommend having no cash at all because any amount may reduce your returns, for practical reasons we believe portfolios have too much cash when they exceed $700 in cash. How should I manage the rest of my cash instead? There are many schools of thought as to how cash can be managed, but the most common objectives are the following: Yield (without meaningful risk) and liquidity-- simultaneously making sure that your cash does not waste away due to the effects of inflation while mitigating potential high risk. That you are able to access your cash within a reasonable amount of time. At Betterment, we spend a lot of time thinking about how to help you make the most of all your money. Idle cash results from cash dividends which are not reinvested. When you use Betterment, your dividends are automatically reinvested, resulting in zero idle cash and zero cash drag from your accounts. In addition, we provide you with a holistic picture of all your investment accounts from a cash management perspective, from idle funds in external accounts to the cash inside the funds you purchase. We highlight each portfolio’s total idle cash, along with a simple projection of how much potential returns could be lost by holding that cash amount long-term.

8 Steps to a Safer and More Secure Betterment Account Here are eight safeguards, including Two-Factor Authentication, that help keep your Betterment account safe and secure. At Betterment, your account security is our priority. We’re working hard to continue building ways to help keep your accounts safe and secure. From our robust physical security protections for our servers to the safeguards we’ve put in place to protect you, our services are designed to improve upon traditional security. Built-In Safeguards to Protect Your Account Betterment has already implemented a number of safeguards to help protect your account. These include: Identity Verification. We conduct thorough identity verification checks for all new customers to confirm that the information provided is accurate, not suspicious, and not on any government watch lists. Transaction Review. We monitor transactions on an automated and manual basis to detect potentially fraudulent and suspicious behavior on our customer accounts. Automatic Logout. If you are logged in and inactive for an extended period of time, we’ll automatically log you out of your account to protect you from unauthorized user access. Contact Information Safeguards. Additional security mechanisms are in place to protect you from unauthorized changes to your account information. Account Ownership Verification. We verify that you have proper access to any synced external accounts, to help ensure that you have linked the correct outside account to your Betterment account. System Outage Protection: If there was ever a system outage, we have processes in place to help keep your financial account data safe and secure. Touch ID: When accessing your Betterment account from an iPhone, you can add a layer of protection by requiring your thumbprint for access. You can even use Face ID on an iPhone X. It’s important to remember, however, that even with all of these safeguards in place, there are a few things you can also do to help protect your account. When conducting personal financial business online or on your mobile device, you are also responsible for helping to keep your personal account secure. We recommend taking the following precautions to help protect your account. Practice Good Password Security Your password is the key to your Betterment account, so we want to help ensure that you’re using a good, strong password. We also know that you’ve heard this a million times, but we’re going to tell you what we think makes your password up to snuff. Good passwords are both long and random. For your Betterment account password, you should avoid using names, places, names of products or services (e.g., “investing” or “Betterment”), and any other factoids that people may know about you or that are discoverable online. Each time you create or reset your account password, we’ll help you see how strong it is. We recommend using unique passwords across all of your online services; this prevents any other services from impacting the security of your Betterment account. While good password practice may seem daunting, there are a number of password manager tools to help you generate and remember your passwords safely. Some examples of these tools are 1Password and LastPass. Two-Factor Authentication To help combat security breaches, Betterment uses two-factor authentication (2FA) to help protect your account from theft, even if an attacker has obtained your password. With this additional layer of security, you’ll be required to enter a unique verification code either from a mobile authenticator application or from a text message or voice call when you log into your account on a new device, or, if you haven’t used 2FA on that device for two years. While no safeguard can 100% guarantee protection against a data or security breach, 2FA makes it significantly more difficult for malicious hackers to access your account. Use App Passwords When Connecting Third-Party Applications to Your Betterment Account Personal finance applications and services (such as Mint and TurboTax) make your life easier. But, they also come with additional risks. By using your username and password to connect these services to your Betterment account, you increase the risk of unauthorized access to your account. Instead, Betterment offers the ability to leverage read-only App Passwords for these services. App Passwords allow you to connect these services for convenience and productivity but in a safer way. When using App Passwords, these services will only have the ability to view your account balance and other financial transaction information, without the ability to make changes, withdrawals, or deposits to your account. This way, you can take advantage of the benefits of these services with an additional level of security. From your Security tab, you should also consider periodically reviewing the third-party services you’ve granted access to your Betterment account, and revoke access from any applications or services that you no longer wish to use. Use Only Trusted Machines and Networks You’re probably using one or two trusted devices for your banking and financial activities. On these devices, make sure you are working with the latest security updates to the operating systems and applications installed. This is actually far easier than it sounds, with most systems and applications offering automated update options. Finally, any time you use a public or unsecured wifi network to access the Internet, you should refrain from logging into any websites containing sensitive personal details or financial information. If you must access these websites using an unsecured network, make sure the URL or Web address begins with “https”; the “s” means that it is secure. If You See Something, Say Something In addition to making it more difficult for hackers, implementing our recommended security tips will make it easier for us to identify suspicious behavior on your accounts. This allows us to more quickly alert you of this activity or take necessary action. We also recommend that you periodically review your account to verify any activity and transactions. Remember that Betterment sends transactional emails to confirm any movement into or out of your account, and you can also review your account activity at any time from the Activity tab. If at any time you suspect that your account may have been compromised or misused, please contact our support team immediately. For more information on our security practices and ways to protect your account, you can visit: https://www.betterment.com/security/security-procedures/

Why Only “Buying Local” When Investing Is Risky Currently, U.S. investors may be asking themselves why they should be investing outside of their home country when their own stock market is doing so well. Just a few decades ago, U.S. investors were asking themselves the opposite question. The third quarter of 2019 brought some very positive news for me on a personal level—I received my green card and am now a permanent resident of the United States. If that’s not enough to make me feel patriotic about my newly adoptive country, I needn’t look further than the U.S. equity markets to feel proud. Over the past decade, the American stock market has been incredibly strong, and by some definitions we qualify for having the longest bull market in history. For example, from September 5th, 2011 until September 5th, 2019, the total return of Vanguard’s VTSAX fund, which tracks the total U.S. stock market, was 252%. Vanguard’s VFWIX fund, which tracks world equity markets outside of the U.S., only had a total return of 58% over the same period. Why invest in international stocks? A natural question after hearing this statistic might be: why does Betterment’s portfolio have such a large allocation towards international stocks? After all, our 100% stock portfolio currently has a target allocation of around 40% in international equities. The short answer is that the Betterment portfolio is designed to be representative of the makeup of global investable assets as a whole, and around 40% of the world’s equity assets are invested outside of the U.S. But an international portfolio can also reduce the risk of overweighting one particular country in your portfolio. Home bias can lead to more risks. Some investors choose to overweight their investments in their home country, which is a phenomenon known as home bias. Home bias can expose your portfolio to more risks as it gets less internationally diversified. An especially gut-wrenching example of these risks occurred during this last quarter for Argentinian investors. Latin American investors tend to have strong home bias, with the average Latin American investor tending to allocate 97.5% of their portfolio to Latin American markets—even though only 1.4% of the global capitalization is Latin American. An extremely high local stock market allocation may have been initially positive for Argentinian investors, because their markets grew over 40% in the first eight months of the year. However, on August 12, 2019, the MSCI All Argentina 25/50 Index fell over 24% in just one day. Currently, the index is now seeing overall negative returns for the entire year. Source: Data from Xignite This recent loss was a blow to Argentine equity investors, especially among those with a strong home bias. It’s worth noting that because Argentina and the U.S. are entirely different countries, we generally shouldn’t expect their markets to behave the same. While Argentina is a beautiful country known for its art, dance, food, mountains, and beaches—it’s also currently battling an extremely high inflation rate. The country is currently instituting currency controls to combat the devaluation of the Argentine peso. True diversification helps equip you for the long haul. It’s impossible to predict what will happen with the U.S. stock market going forward. But, we do know that historically, U.S. stocks have also seen long streaks of underperformance compared to international stocks. In the chart below, we plot the 2-year annualized returns of the MSCI EAFE index, which tracks the performance of international developed stocks, and the MSCI USA index, which tracks U.S. equities. Highlighted in gray is any period where international stocks outperformed U.S. stocks. Keep in mind that past performance is not indicative of future performance. Source: Data from MSCI Since the start of the indices, we see that U.S. stocks have outperformed international stocks about 57% of the time. However, until 1990, U.S. stocks only outperformed international stocks 32% of the time. At that time, U.S. investors may have been asking themselves the exact opposite question—why invest in American equities that are lagging international markets? True international diversification means that your portfolio won't likely have the highest returns—but it will also generally be better equipped to handle local crises and downturns. We now live in a globalized world, and your portfolio at Betterment is designed not only to help avoid the risk of local downturns, but to capitalize on global growth over the long term.

If You Live In Pennsylvania, These Tax Rules Might Help You Save On Taxes If you're a Pennsylvanian, it’s important to be aware of certain tax rules so that you can save more of your hard-earned money. The Declaration of Independence and the Constitution were both signed in Philadelphia, Pennsylvania. The city represents the foundation of American history and it attracts visitors from around the world. What else makes the state so popular? Maybe it’s the opportunities to engage in a variety of experiences—from devouring the best twisted pretzels—when not eating cheesesteaks—to visiting Punxsutawney for Groundhog Day. As a state of many historic “firsts”, the first zoo in America was built in 1874 in Philadelphia. There, you can currently see endangered Amur tiger brothers Wiz and Dimitri, who were actually born one day apart. The PA state income tax rate is 3.07%, which is lower than state taxes in nearby NY, NJ, and CT. Unlike most other states in the area which have a progressive tax system, PA’s state income tax rate is the same regardless of the amount of income received. Many localities in PA impose an additional tax on earned income at the rate of 1%, but this may vary depending on the locality. Philadelphia residents pay an extra 3.8712% tax on earned income and investment income. We’ll show you how you can take advantage of PA tax rules for education, retirement, and investments. First, a reminder: Due to 2017 tax reform, the federal tax deduction for state and local taxes (otherwise known as SALT) is now limited to $10,000 per year. Prior to the implementation of tax reform in the 2018 tax year, there was no dollar limit on the deduction. This article is intended for purely educational purposes. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. Education Saving for your child’s college education might feel overwhelming, especially when you’re trying to prioritize education savings with your other goals in life, such as retirement. PA makes saving for education a little easier by allowing a $30,000 deduction per beneficiary for married couples who contribute to a 529 plan (or $15,000 for single taxpayers). PA is among a small number of states (AZ, AR, KS, MN, MO, MT) that allow for tax parity, which is a tax benefit for contributions to any state 529 plan. Rinse and repeat—because you can contribute and take the deduction every year. Retirement Ever wonder why so many people retire in Florida? Sunshine aside, moving to Florida is a common strategy for many northeast highly taxed residents because Florida has no income taxes. To encourage Pennsylvanians to retire in their own state, PA allows for a broad retirement income exemption on IRAs and employer sponsored plans, such as 401(k)s and pensions. Example: A retired married couple who are both age 65 years with a $60,000 annual pension, $30,000 annual IRA distribution, and $40,000 in Social Security benefits, would be fully exempt from PA income taxes. PA does not allow for pre-tax employee contributions to any type of retirement plan. Employee contributions to Traditional 401(k), 403(b), 457 governmental, Thrift Savings Plan, Traditional IRA, SEP IRA, and Simple IRA accounts are always after-tax for PA state tax purposes. It is a good idea to keep track of these contributions in the event of an early distribution which would only be PA taxable after all employee contributions have been recovered. Social Security Prior to 1984, Social Security benefits were tax-free to all recipients, regardless of how much other income they received. After the 1984 change went into effect, the federal government has expanded the taxation of Social Security benefits to potentially include up to 85% of benefits as taxable income. PA has taken a generous step to fully exempt Social Security benefits from state income taxes for everyone—regardless of income level. Investments As a state, PA does not always have the power to choose what income it allows exemptions for. Due to federal law, PA is required to exempt U.S. government interest from income taxes. This tax break also applies to mutual funds and ETFs that invest in U.S. government bonds. Municipal bonds issued by the state of PA and its municipalities are exempt from PA income taxes. However, interest received on bonds issued by other states and local governments are subject to PA income taxes.1 PA does not recognize capital loss carryovers. Why is this important? Let’s say you have a $100,000 unused capital loss from a prior year, and a $100,000 capital gain for the current year. The federal government would allow the carryover loss and the gain to offset each other. However, PA would ignore the unused capital loss from last year and the $100,000 gain from the current year would be subject to PA income tax. Also not recognized by PA is the netting of capital losses between one spouse’s individual account and capital gains from the other spouse’s individual account in the same tax year. Why is this important? Let’s say one spouse has a $100,000 capital loss and the other spouse has a $100,000 capital gain for the current year. PA would ignore the $100,000 capital loss and require the 3.07% tax to be paid on the $100,000 gain. This can be a solvable problem as long as you put in some advance planning. If all assets are held jointly, the current year’s capital losses can offset the current year’s capital gains. Here are some fun tax facts to tell your fellow Pennsylvanians. PA has a reciprocal agreement with six states: Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia. The agreement allows a PA resident who works in any of these states to “make believe” they never crossed PA state lines, so that they only pay PA income tax on their compensation. The benefits of this agreement include avoiding paying higher state taxes to their work location state, as well as avoiding additional tax software filing fees. If every state had a reciprocal agreement with all of its neighboring states, it might send the tax software business into a tailspin. PA adds an 18% flood tax to the sale of every bottle of alcohol. The tax was instituted to fund the recovery of the Johnstown flood in 1936 and still remains today. Once the tax spigot is turned on, it is very difficult to turn off. Candy and gum are exempt from sales tax. Good lobbying, Hershey. 1 The only exception to this “out of state rule” are for bonds issued by governments who have an exemption per federal law. Examples include Puerto Rico and Guam. Note that Betterment is currently available to residents in Puerto Rico and the Virgin Islands, but we currently do not support residents in Guam. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

If You Live In New Jersey, These Tax Rules Might Help You Save On Taxes If you're a New Jerseyan, it’s important to be aware of certain tax rules so that you can save more of your hard-earned money. New Jersey is the most densely populated state in the nation. What makes the state so popular? Maybe it’s the opportunities to engage in a variety of experiences—from devouring the best thin crust pizza to relaxing at historic Liberty State Park. Due to its unique geography, South Jersey is one of the few places where you can see both a sunrise and a sunset over the water. It’s not shocking for residents of the Garden State, whether they live in Central NJ or on a prayer, when I remind them that NJ income taxes are among the highest in the nation. The maximum NJ state income tax rate is 10.75%, but that rate only applies on income above $5,000,000. The top rate for most people is 6.37%, which is the tax rate for married couples filing above $150,000 on their joint tax return. Unlike some other areas of the country, there are no local income taxes in NJ, so residents are only taxed on income at the state and federal level. Because NJ taxes are so high, people who are usually uninterested in taxes are all ears once they learn more about how they might be able to save on taxes by taking advantage of certain New Jersey tax laws. First, a reminder: Due to 2017 tax reform, the federal tax deduction for state and local taxes (otherwise known as SALT) is now limited to $10,000 per year. Prior to the implementation of tax reform in the 2018 tax year, there was no dollar limit on the deduction. This article is intended for purely educational purposes. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. Medical Expenses I've written about tax deductions and how they work previously. The federal government allows for a deduction for unreimbursed medical expenses that exceed 10% of your Adjusted Gross Income (AGI). That’s a high threshold to meet, so it makes it pretty difficult to get any tax benefit. NJ is substantially more generous and allows a deduction for unreimbursed medical expenses that exceed 2% of NJ gross income. NJ medical expenses also include employee-paid health insurance premiums, as those are included as income for NJ income tax purposes. Retirement Ever wonder why so many people retire in Florida? Sunshine aside, moving to Florida is a common strategy for many NJ residents because Florida has no income taxes. In 2016, one high-income NJ taxpayer moved to FL and it was the “first time a state official has warned of a budget risk because of one resident’s relocation” per the New York Times. To encourage New Jerseyans to retire in their own state, NJ allows a $60,000 retirement income exclusion for a single taxpayers age 62 or older. The exclusion for married couples is $80,000 (for those unfamiliar, the fact that the married couple does not receive twice the exclusion of a single person is known as the “marriage penalty”). This exclusion benefit also applies to distributions from IRAs and qualified employer-sponsored plans like 401(k)s and pensions. This means that up to $80,000 of retirement income will not have any income taxes—as long as the NJ total income on the tax return does not exceed $100,000. Unfortunately, the retirement exclusion completely disappears if total NJ income exceeds $100,000 per tax return threshold—even by just $1.00. In addition to the retirement income exclusion mentioned above, retirees who are receiving a military pension are also eligible for an unlimited exclusion for pension income related to that specific employment. Example: A single former Army officer who is currently 65 years old, with a $60,000 annual pension and a $30,000 annual IRA distribution, would be fully exempt from NJ income taxes. NJ only allows for pre-tax employee contributions to one type of retirement plan: Traditional 401(k) accounts. Employee contributions to 403(b), 457 governmental, Thrift Savings Plan, Traditional IRA, SEP IRA, and Simple IRA accounts are always after-tax for NJ state tax purposes. Whenever I meet a NJ teacher who has a 403(b), they are typically unaware that NJ taxes the contributions at the state level. These teachers can track their contributions in order to avoid potential double taxation in retirement. If the contributions are left untracked, double taxation could occur if they cannot use their retirement exclusion due to their total NJ income exceeding $100,000 or they take an early distribution before the age of 62. Social Security Prior to 1984, Social Security benefits were tax-free to all recipients, regardless of how much other income they received. After the 1984 change went into effect, the federal government has expanded the taxation of Social Security benefits to potentially include up to 85% of benefits as taxable income. NJ has taken a generous step to fully exempt Social Security benefits from state income tax for everyone—regardless of income. Investments As a state, NJ does not always have the power to choose what income it allows exemptions for. Due to federal law, NJ is required to exempt U.S. government interest from income taxes. This tax break also applies to mutual funds and ETFs that invest in U.S. government bonds. Municipal bonds issued by the state of NJ and its municipalities are exempt from NJ income taxes. However, interest received on bonds issued by other states and local governments are subject to NJ income taxes. NJ does not recognize capital loss carryovers. Why is this important? Let’s say you have a $100,000 unused capital loss from a prior year, and a $100,000 capital gain for the current year. The federal government would allow the carryover loss and the gain to offset each other. However, NJ would ignore the unused capital loss from last year and the $100,000 gain from the current year would be subject to NJ income tax. To help make tax time even easier for our customers who invest, we’ve introduced a new supplemental tax statement which provides a breakdown of US Government interest and in-state vs. out-of-state municipal bond interest. Here are some fun tax facts to tell your fellow New Jerseyans. Sales tax can be funny sometimes. NJ does not tax unprepared food like a whole bagel, but one that is toasted for you is taxed. As an avid consumer of poppy seed bagels lathered in cream cheese, this tax is pretty unavoidable for me. NJ does not tax pumpkins used for food, but they do tax pumpkins used for decoration. NJ didn’t have income taxes until 1976 when it first introduced a personal income tax with only two brackets: 2% on the first $20,000 of income, and 2.5% on any additional income after that. You’ll probably never guess what I think about on my daily commute as I traverse the Hudson river on the PATH train to get to the Betterment office. Ok, you’re right–I’m always thinking about how taxes can apply to my current situation. I previously mentioned that NJ generally taxes interest on bonds issued from outside of NJ. What about bonds issued by the Port Authority of NY and NJ? There is no state or local tax on interest earned from their bonds for both NY and NJ residents. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

Riding Out Rollercoaster Markets Riding out market volatility is much like riding a rollercoaster: staying securely in place with your investments will help safeguard you from those drastic market dips. Raging Bull. Great Bear. Rampage. Dare Devil Dive. These are the names of roller coasters guaranteed to deliver chills and thrills. They’d also make good taglines for investment market conditions of late. As an investor, you may be asking yourself, “What’s happening? Why are there so many hair-raising ups and downs? What safeguards should I be putting in place?” Here’s your guide on the recent market volatility, and how to help protect yourself while riding out this rollercoaster. What’s Up (and Down) Trade wars. Interest rate hikes. Government shutdown. Brexit. These developments sent US investors on a wild ride in late 2018. In case you were distracted by holiday prep, here’s what went down. During the most recent Christmas week, the Dow Jones Industrial Average swung 350+ points on all but one trading day. That included a record-setting plunge of 653 on Christmas Eve. Then another record-breaker happened the day after Christmas. With a whopping 1086 point gain, the Dow clawed back the previous session’s losses and more. But the chills and thrills didn’t start or end there. Both the Dow and the S&P 500 had their worst December since 1931. By year end, the market had suffered its biggest annual decline since 2008 ushered in The Great Recession. En route, investors were treated to half of the ten biggest single day swings in market history, all happening within one year and on the heels of the longest bull market ever. Is this the start of a new normal? Thankfully, a key measure of market volatility suggests not. According to a recent Forbes article, the standard deviation of the S&P 500 was 15.8% in 2018, very nearly matching its 15.6% long-term average. Contrast this to 2017, when the S&P 500 logged a standard deviation of only 6.7%, the second lowest on record and not even half that of 2018. Of course, as recent events have reminded us, that period of relative calm could not last forever. But it may have lulled us into a false sense of security, causing 2018’s return to “the old normal” to feel all the more whiplash-inducing. Along for the Ride Investors aiming to successfully weather volatile markets might want to look to the past for guidance and reassurance. It’s been said that history doesn't repeat itself; rather, it rhymes. So too investment markets. It goes something like this. Roses are red, violets are blue. Markets go up, But must come down too. We can’t guess how far, And we can’t know how long. But for those who are patient, Returns should be strong. Sounds simplistic, trite even, but if you invest, expect ups and downs. You may not love the downs, but just remember that uncertainty typically drives returns. That’s why you having a financial plan suited to your goals and tolerance for risk is key. Everybody knows that – intellectually, at least. As easy as it is to understand all of that, it’s usually harder to practice. Remembering to put good investing habits to use can be difficult  when you see the downside of uncertainty at work on your money: The thing needed to put food on the table, a roof over your head, your kids through college, and a retirement in the realm of possibility. “I plan to buy high, sell low,” said no one ever. But on average, investors tend to fare much worse than the market, because that’s exactly what many unintentionally do. One study found that the average equity fund investor underperformed the S&P 500 by almost 3% annually for the two decades through 2016. Sure, fees account for some of that, but most of the gap is the result of human nature driving badly-timed, fear-based decisions. Even investors who get out of the market near market highs still have to guess “right” about when to get back in. With fear driving actions, most investors wait too long.  Unfortunately, that often means missing a big chunk of the gains, which usually occur when markets first start to recover. To wit: The S&P 500’s worst 7 quarters since 1940 were followed by a healthy average 23% return in the year that followed. Of course, there’s no guarantee markets will recover from such precipitous drops, whether they are driven by global events, intrinsic value, or fear. But a rational investor with knowledge of market performance through challenging times past would be hard-pressed to bet against it. Stay Buckled in Your Seat Repeated time and again over multiple market cycles, investor behavior during challenging times is a key driver of net worth and, ultimately, the ability to meet your financial goals. During market rollercoasters like this most recent one, it’s important to stay buckled in your seat and stick with your financial plan.

If You Live In New York, These Tax Rules Might Help You Save On Taxes If you're a New Yorker, it’s important to be aware of certain tax rules so that you can save more of your hard-earned money. New Yorkers get to experience the best of everything—from a beautiful rainbow at Niagara Falls to the classic symbol of our freedom that is the Statue of Liberty. But, it’s not shocking for people living in the Empire State when I remind them that NY income taxes are among the highest in the nation. The maximum NY state income tax rate is 8.82%. Some New York City residents might pay as much as an additional 3.876% for the privilege of living in the five boroughs: Manhattan, Brooklyn, Queens, The Bronx, and Staten Island. Because NY taxes are so high, people who are usually uninterested in taxes are all ears once they learn more about how they might be able to save on taxes by taking advantage of certain New York tax laws. First, a reminder: Due to 2017 tax reform, the federal tax deduction for state and local taxes (otherwise known as SALT) is now limited to $10,000 per year. Prior to the implementation of tax reform in the 2018 tax year, there was no dollar limit on the deduction. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. Education Saving for your child’s college education might feel overwhelming, especially when you’re trying to prioritize education savings with your other goals in life, such as retirement. NY makes saving for education a little easier by allowing a $10,000 deduction for married couples who contribute to a NY-sponsored 529. Rinse and repeat—because you can contribute and take the deduction every year. Retirement Ever wonder why so many people retire in Florida? Sunshine aside, moving to Florida is a common strategy for many NY residents because Florida has no income taxes. To encourage New Yorkers to retire in their own state, NY and NYC allow a $20,000 retirement income exclusion for people 59 ½ or older. This means that up to $20,000 of income will not have any income taxes. What about married couples? Each spouse who meets the age requirement is entitled to their own $20,000 tax break. This benefit also applies to distributions from IRAs and qualified employer plans like 401(k)s and pensions. In addition to the $20,000 pension exclusion mentioned above, retirees who were employed by the Federal government, NY state, or local government are also eligible for an unlimited exclusion for retirement income related to that specific employment. Example: A former NYC firefighter who is currently 60 years old, with a $50,000 annual pension and a $20,000 annual IRA distribution, would be fully exempt from NY and NYC income taxes. Social Security Prior to 1984, Social Security benefits were tax-free to all recipients, regardless of how much other income they received. After the 1984 change went into effect, the federal government has expanded the taxation of Social Security benefits to potentially include up to 85% of benefits as taxable income. NY and NYC have taken a generous step to fully exempt state and local taxes for all Social Security benefits for everyone regardless of income. Investments As a state, NY does not always have the power to choose what income it allows exemptions for. Due to the federal law, NY and NYC are required to exempt U.S. government interest from income taxes. This tax break also applies to mutual funds and ETFs that invest in U.S. government bonds—as long as they represent at least 50% of the assets in the fund. Municipal bonds issued by the state of NY and its municipalities are exempt from NY and NYC income taxes. However, interest received on bonds issued by other states and local governments are subject to NY and NYC income taxes.1 Betterment’s standard portfolio for taxable accounts utilizes MUB, a bond ETF that provides exposure to municipal bonds across many states. We also offer an ETF that invests solely in New York municipal bonds—for New York residents with a minimum balance (or an intent to fund)—of at least $100,000. If you want to switch out MUB in your portfolio to NYF, please email us. We generally recommend making this switch before you fund your account, if possible. To help make tax time even easier for our customers who invest, we’ve introduced a new supplemental tax statement which provides a breakdown of U.S. Government interest and in-state vs. out-of-state municipal bond interest. Here are some fun tax facts to tell your fellow New Yorkers. Sales tax can be funny sometimes. For example, NY does not tax unprepared food like a whole bagel, but one that is sliced for you is taxed. As an avid consumer of poppy seed bagels lathered in cream cheese, this tax is pretty unavoidable for me. Until 1999, NYC income tax applied to commuters working within NYC. However, there was a court ruling which stated that NYC could not exempt NY commuters from the tax and impose it on only NJ and CT commuters. Consequently, the NYC commuter tax was ultimately repealed for all commuters. Unfortunately, another version of a NYC commuter tax called “congestion pricing” will be implemented for drivers who enter the southern part of Manhattan, starting in 2021. You’ll probably never guess what I think about on my daily commute as I traverse the Hudson river on the PATH train to get to the Betterment office. Ok, you’re right–I’m always thinking about how taxes can apply to my current situation. I previously mentioned that NY generally taxes interest on bonds issued from outside of NY. What about bonds issued by the Port Authority of NY and NJ? There is no state or local tax on interest earned from their bonds for both NY and NJ residents. 1 The only exception to this “out of state rule” are for bonds issued by governments who have an exemption per federal law. Examples include Puerto Rico and Guam. Note that Betterment is currently available to residents in Puerto Rico and the Virgin Islands, but we currently do not support residents in Guam. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

How To Find Affordable Life Insurance Buying cheap life insurance doesn’t have to mean skimping on coverage. Knowing how companies set rates means you can take the right steps to finding an affordable life insurance policy. Life insurance is a crucial part of a financial safety net. But in addition to getting the best life insurance coverage, you also want to find an affordable life insurance plan. It may seem like there has to be a tradeoff between finding a cheap policy and a comprehensive one, but there are things you can do to help you find an affordable policy. In this article, we’ll discuss how to: Buy life insurance early. Buy a term life policy. Get the right amount of coverage. Understand the underwriting process. Choose the best life insurance company for your situation. Compare quotes. Don’t be afraid to use a broker. Buy life insurance early. Life insurance isn’t usually a top priority for young people, since they might not have mortgages, dependents or the same financial responsibilities that older people might have. But one big way to help yourself get cheaper life insurance is to buy early. Life insurance is almost always cheaper the younger you are when you buy it. Rates rise an average of 8-10% every year you put off applying. Plus, when you buy young, you lock in premium rates for the entire duration of the policy. That means you’ll be paying the same low insurance premiums decades later. The following table demonstrates how the monthly cost of a term life insurance policy increases as you age, based on three coverage amounts. These numbers reflect the average monthly premiums for men. Average rates for women are generally lower. Average Life Insurance Rates By Age AGE $500,000 $750,000 $1,000,000 30 $25.97 $36.25 $43.94 35 $27.26 $38.18 $47.37 40 $36.68 $52.28 $65.32 45 $58.22 $84.75 $108.15 50 $87.81 $129.13 $167.06 55 $140.95 $208.85 $257.14 60 $233.36 $347.46 $456.42   This explainer gives an in-depth look at life insurance rates by age and the benefits of buying young. Shopping for life insurance over 50. Even though you’ll typically get better rates if you buy when you’re younger, you may still need to buy insurance later on in life. While it will inevitably be more expensive, it’s still possible to find low-cost life insurance, especially if you’re healthy. One way to find an affordable insurance policy is to look for a smaller benefit amount and shorter term length than you would if you were buying in your 30s. Now, this doesn’t mean you’re giving up the coverage you need in order to save money. Because you have fewer, if any, dependents, you likely just don’t need as much coverage as you would have needed decades earlier. So consider a smaller policy, such as one that lasts just until your mortgage is up. This guide will help you determine what length of benefit you actually need. You can also look into types of no-medical-exam life insurance, like simplified issue or guaranteed issue life insurance. These allow you to apply for a life insurance plan without getting a medical exam. They can be more expensive than a typical term policy, but they’re still a good option for some older or less-healthy applicants because they have less-stringent health qualifications. If you’re an older applicant, start your search by learning more about the best life insurance for seniors. Buy a term life policy. In almost every case, term life insurance is the most affordable option. It’s also the most straightforward type of life insurance; it provides only a death benefit, without any additional investment components, and it expires after a set period of time. Because you can choose whichever term length works for your situation, you only pay for the insurance coverage you want. If you’re in your mid-30s, you could realistically take out a 20-year, $1 million term life policy and pay insurance premiums of about $45 per month. Affordable Whole Life Insurance Whole life insurance is a type of permanent life insurance, which means it lasts for as long as you continue paying your premiums, with no expiration date. It’s also a type of cash-value life insurance with an investment option that gains interest over time. A whole or permanent life policy can be a valuable tool for some people, especially those who have complex financial situations and would benefit from the cash value. However, the investment component and maintenance fees make whole life insurance rates up to six to ten times as expensive as term life. If you do want a whole life policy, the best way to find an affordable policy is to be smart about the coverage you need, the company you choose, and your overall health. Long-term Care Insurance The majority of people who turn 65 will need some form of long-term care and the U.S. Department of Health & Human Services, estimates an average cost of $138,000. So while a death benefit can help your loved ones after you pass, you may also need to pay for care before you pass. That’s where long-term care (LTC) insurance comes in. LTC insurance helps you pay the costs associated with chronic illnesses, like Alzheimer’s, that leave you unable to care for yourself. LTC can cover nursing home costs and at-home care if you’re unable to live alone. LTC insurance can be costly so there are a couple of things to consider. For starters, ask about a long-term care rider as you look for your regular life policy. Some companies offer standalone LTC plans but they are usually more expensive than a rider and it’s harder to qualify for them. The other advice in this article also applies to getting LTC. In particular, you can save significantly by getting coverage for LTC in your 50s or earlier. By the time you get into your 60s, adding LTC to your insurance will cost you thousands more. Supplemental Group Life Insurance Another way to keep a personal life insurance policy affordable is to supplement it with employer-provided coverage. Group coverage through a workplace is a common benefit that you can get at little or no cost. The downside is that it usually won’t provide enough coverage for all your needs and it’s tied to your employment. But while an employer-provided group policy isn’t enough on its own, it can supplement a private policy. If you’re able to get, for instance, $50,000 worth of coverage for free, you can consider lowering your private policy (and thus your monthly premiums) slightly to make it more affordable. Get the right amount of coverage. It’s easy to overestimate the amount of life insurance you need and buy too much, raising the cost considerably. But it’s also easy to underestimate how much you need, potentially leaving your beneficiaries on the hook. A good rule of thumb is that the insurance you need is equal to 10-12x your salary. You can estimate how much coverage that means for you by using a free life insurance calculator. You can also crunch the numbers on your own if you prefer. Either way, make sure to consider all of your financial obligations when choosing a benefit amount and term length. For example, take the following into account: Existing debt, like a mortgage or student loans. Future college plans (for you, a spouse, or a child). Dependents, including children and aging parents. Any financial cushion you want to leave behind. Final expenses, like end-of-life medical care or funeral costs. Consider the ladder strategy. One tricky situation when it comes to how much life insurance you need is that your coverage needs decrease over time: your mortgage debt decreases, you need to provide for kids for less time, and so on. By using the ladder strategy, you can get the coverage you need while ensuring you’re not paying for coverage you won’t need later in life. With the ladder strategy, you buy multiple policies of varying coverage amounts and term lengths. As the decades pass, some policies will expire, and at the end you’ll be paying for a small policy that covers your current needs and nothing extra. Policyholders can spend up to 50% less on life insurance by laddering smaller policies versus buying one larger policy. Understand the underwriting process. Life insurance companies largely set the price of policies through the underwriting process. This is where they determine how risky an applicant is to insure by using: Your current health and medical history. This is done primarily through a paramedical exam and a request for documents from your doctor. Motor vehicle reports that show your driving record. A phone interview with you to find out if you have any dangerous habits (like smoking) or hobbies (like rock climbing). At the end, the underwriter will assign a classification to you that determines your policy cost. There isn’t anything you can do to change what happens in the underwriting process, but knowing beforehand what insurance companies look for can help you take steps to lower your insurance costs. For example, a health condition like diabetes can result in more expensive life insurance. But with certain steps to manage your condition, like taking the proper medication or treatments, insurance carriers may lower your premiums. Before you apply for life insurance, help yourself by taking a minute to learn more about what happens during the life insurance underwriting process. Choose the best life insurance company for your situation. Life insurance companies use your health to determine your policy cost, but not all carriers treat health conditions the same way. One common example is that certain companies offer better rates than others for former or current smokers. Certain companies also offer better rates for people of certain ages, military personnel, high-net-worth individuals, recovering alcoholics, those who recently lost weight, people with high blood pressure, or individuals with certain types of cancer. These differences between companies are why the best life insurance company for you is usually the one that is most accommodating to your health situation. Going with the wrong one can cost you thousands of dollars over the decades you own the policy. To see which companies offer comprehensive and  affordable life insurance coverage based on specific factors like your age, lifestyle, or health circumstances, see our page on a few top life insurance companies. Compare quotes. Taking all of the above into account — coverage amount, type of policy, company differences — can feel overwhelming. But if you want the best insurance rates, it’s also crucial to compare life insurance quotes for different plans. An easyway to quickly compare quotes from multiple insurance carriers is with an automated process like Policygenius. Otherwise, you will need to do all of the above — figure out what type of insurance you need, the death benefit size, which company is best for a given health situation, and more — and then go to each company individually, write down their offers, and compare manually. And if you do it manually, you’ll still need to apply through the insurance carrier, another thing Policygenius helps you do quickly and without putting you through a confusing online application. Don’t be afraid to use a broker. Knowing how to get an affordable life insurance plan is important, but so is recognizing some myths about saving money. It’s untrue that you can save money by buying directly through an insurance company. Using a life insurance agent or broker does not come with additional costs. Life insurance rates are highly regulated, so the same policy cannot be offered at a discount by some parties or marked up by others. You will pay the same amount for an individual policy whether you buy from the carrier or use an independent broker. Additionally, independent brokers (like Policygenius) can help guide you through the process and answers questions you may have about how certain policies or companies compare. We’ve also debunked a few other common myths about life insurance to make sure you understand what you’re getting with your policy. Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you. This article originally appeared on Policygenius, a licensed insurance broker. Betterment is not an insurance broker and this article is not insurance advice nor an offer for particular insurance products or services. The content was not written by an insurance agent, and it is intended for informational purposes only, and it should not be considered legal or financial advice. Betterment makes no warranties or representations with respect to specific insurance offerings.

5 Financial Steps To Take After Getting A Raise When you get a raise at work, consider how you can maximize your earnings to identify new financial opportunities. If you’ve recently received a raise, congratulations! You worked many long hours to deserve this, and now your hard work has paid off. Whether this pay increase was expected or whether it was a complete surprise, you may have many thoughts running through your mind, including calling your spouse or your Mom, deciding what restaurant you are dining at for a celebration, or how your new salary will give you more freedom to take that vacation you’ve been wanting to go on. While you should be excited, it’s important to take a step back to reassess your new pay and how it impacts your financial situation. Without doing so, you might find that your raise is more harmful than when you were making less money. To avoid having “raise-regret”, consider these five tips. 5 Things To Do After Receiving A Raise 1. Understand your new salary. While you deserve to celebrate, you may want to hold off on making any large purchases that were unplanned and not saved for with your new cash flow. Unlike a bonus, where you receive a lump sum, your raise is going to be broken out across all pay periods. Additionally, your raise is going to be stated as an increase to your gross pay. In other words, if you receive a $5,000 annual raise, that does not mean that you are pocketing $5,000 over the course of the next year because we have to pay taxes. If you aren’t familiar with the amount of taxes you pay, it could be worthwhile to check your last few pay stubs to determine how much was going to taxes versus how much you were keeping. Also note that depending on the amount of your raise and the time of year, it may push you into a higher tax bracket. You may want to speak with your Human Resources and Payroll departments to discuss your tax withholding, as well as an accountant or qualified tax professional to see how your increased earnings could impact your personal tax situation. 2. Increase your retirement savings. If your employer offers a 401(k) plan and matches your contributions, you should consider contributing at least enough to get the full match amount. Granted that you were already doing so, or that your employer does not offer a match, increasing your retirement savings may still be a great option. And, for those who are comfortable with their lifestyle prior to receiving a raise and don’t plan to make any changes, you can supercharge your raise by increasing your savings rate at an equivalent rate to your bonus. Determining how much you need to save for retirement will depend on several factors. Betterment offers retirement planning tools that can provide guidance on not only how much you should save, but the optimal accounts for you to do so based on your situation. 3. Establish, or revisit, your emergency fund. Having an emergency fund is one of the most important financial savings goals, as it can help ensure a level of financial security for yourself and your family. An adequate emergency fund will allow you to cover truly large and unexpected expenses, and can also cover your costs if you end up losing your job. It can even provide financial freedom in the case that you want to try your hand at a new career. Typically, Betterment advises that your emergency fund should cover three to six months worth of expenses. If you didn’t have one prior to your raise, now would be a great time to start. If you already have an emergency fund, you may need to reevaluate the amount needed if your spending does increase. 4. Pay off debt. If you have any debt, especially high interest debt, you may choose to use this new capital to pay off some of your loans. Let’s assume that you are a single taxpayer, live in a state with no state income tax, and at the start of 2019 your pay went from $60,000 to $65,000. Assuming you don’t itemize, that would place you squarely in the 22% Federal tax bracket. If you get paid twice per month (24 times per year), your net paycheck would go from $1,950 to $2,112, an increase of $162. If you have student loans of $50,000 at 7% interest that were to be paid over 10 years, your minimum monthly payment would be about $580. Increasing your monthly payment by $162 would allow you to pay off your loans almost three years faster, and also help you save almost $6,000 in interest payments! 5. Invest in yourself. Okay, let’s say you’re already on track with your retirement goals, have an emergency fund, and paid off your debt. What do you do then? Investing in yourself can have immense value. And the best part is, it can be done in many ways. Whether that’s taking a vacation to reset your mind after months of diligent work, taking a class to enhance your skills or learn a new one, or even making a material purchase that you feel will better your quality of life, investing in yourself can be a great way to reap the benefits of your hard earned work. If you plan on spending this extra money, just make sure that it’s within your means—don’t fall victim to lifestyle creep. Inherently, you may be a saver by nature. While it’s important to set goals, you may not have a specific goal for these additional savings. By investing additional cash flow in a well-diversified portfolio, you can help to create an even larger raise for yourself at some point down the line. For example, using a taxable investment account will give you more flexibility as to how and when these savings can be used.

Plan Ahead When Saving For Vacations We’ll help you plan and save so you can stress less about your bank account while you’re on the beach, on top of a mountain, or wherever else your travels take you. Taking a vacation isn’t something that should make you feel guilty. Unplugging from work can help you connect with your loved ones, the world around you, and even yourself. Here at Betterment, we recognize this with policies that encourage work-life balance for our employees. Thankfully, our financial advice can help you, too. When you’re prioritizing your financial goals, consider any vacations you plan to take in the future. Perhaps you know you’ll have to travel for a wedding next summer, or your family always takes an annual summer vacation when the kids are out of school. Don’t make the mistake that 55% of Americans make—forgetting to budget and save for an expected vacation. As your financial partner, Betterment can help you plan so that you can be a smart investor and get some well deserved relaxation. How To Plan A Vacation I live in New York City, so when I think about a vacation, I often think about pristine white sand beaches and serene ocean views. Let’s say you were planning a hypothetical vacation to the beaches of Florida next summer: we’re going to walk through the setup of a major purchase goal so that you can see exactly how Betterment helps you prepare. First, let’s talk about cost. Although the cost of a vacation can vary greatly depending on your destination, the price tag of the average vacation is about $1,145 per person. For a family of four, this would increase fourfold to a total of about $4,580. These figures will frame our discussion today, but make sure to do your own research on your desired destination before setting up your vacation goal in your Betterment account. Know that if costs change, your goal can be adjusted and updated at any time. Setting Up A Major Purchase Goal After choosing a destination and determining the cost, the next step is to set up a major purchase goal, either on the website or through the mobile app. Simply using a goal-based system to save and invest for a vacation can help you actually achieve that goal—among other benefits. Let’s name the goal “Florida Vacation” to stay organized and differentiate it from other savings goals. If you wanted to take this vacation in the next year, set the time horizon for one year, just in time for next summer. Assuming that you’re traveling alone, select the average vacation cost of $1,145 for the target amount, knowing that you may end up needing more or less, depending on what flight and hotel deals you’re able to find. As shown above, Betterment has selected a risk level for you that’s 24% stocks and 76% bonds. This risk level is based on the amount of time you’ll be investing for, which is only one year. Generally, the shorter your time horizon, the less risky you’ll want to be with your savings. Auto-adjust is also selected by default, which means that the risk level will automatically be dialed down even more as you get closer to your vacation date. Reviewing The Possible Outcomes As shown in the screenshot below, after setting up the target amount, time horizon, and risk level, you’re then presented with a graph that tells you the earnings over the designated time period under certain levels of expected market performance. You will likely meet your savings target plus an additional $6. That’s good, because airport coffee can be expensive. If the market performs poorly, Betterment’s technology predicts that the growth projection is $45 less than the target. This means that you would likely need to make some minor last-minute adjustments to your plans (for example, taking public transportation to and from the airport rather than a cab). Regardless, you can still feel good knowing that you’re saving most of what you might need. Automating Future Deposits Most importantly, the screenshot above demonstrates how Betterment also recommends a monthly deposit amount you should be putting into the goal so that you can reach your target of $1,145. It looks like a monthly deposit of $94.49 is the recommended amount according to Betterment, although you could always split it in half and set up auto-deposits to occur when you get your paycheck (every two weeks, bi-weekly, etc). Because this is the one of the most recommended ways to set up auto-deposits, you should choose the option that aligns with your pay schedule. For a family of four, coming up with $4,580 to drop on a summer vacation might seem like a challenge when thinking about all of your other expenses. However, breaking it down into “per-paycheck” deposit amounts over a year period makes it seem more manageable. For a Betterment major purchase goal that’s set for a one year time horizon, and a target amount of $4,580, the recommendation is a monthly deposit of $377.95. Split between two paychecks per month, and even between two spouses, the “per-paycheck” savings per spouse would be about $94.49. As you can see, it pays to plan ahead. If you don’t have a Betterment account yet, there are no upfront costs associated with signing up to create your own major purchase goal. Take a look at the advice and play around with different target amounts and time horizons. If you do decide to invest your savings with us, our management fee of .25% offers unlimited access to automated portfolio management, Tax Smart investing features, personalized financial dashboards and customer support. In a year’s time, you will thank your past self for taking the time to set up a major purchase goal and automating your deposits. I suspect that your family will, too.

How A Generation Gap Impacts Finance For Women Personal finance needs vary greatly across generations — but perhaps even more so for women. When the topic of “women and money” comes up, the focus is usually on the gender gap. Much has been written about how women have to overcome wage disparity, the “pink tax”, risk aversion, and longer life expectancies to achieve their financial goals. But, these common focuses ignore a potentially larger gap: How women’s financial needs vary from one generation to the next. Some of this “generation gap” is the natural result of being at different stages of life. The role of women in the family, the workplace, and society has evolved so much that what worked in Grandma’s day may no longer even be an option for her daughters and granddaughters. To understand this better, let’s look at a hypothetical family. A Millennial's Financial Circumstances The countdown to her 10th high school reunion is on. It’s three months out, and her phone is flooded with group text messages about travel details and plans for that weekend. One friend in the group suggests making a reservation at an upscale restaurant near the venue for dinner before the reunion begins. There's just one problem: She’s still paying off last year’s round of bridesmaid duties. That, and not so long ago she was laid off from her full-time job. She’s patched together side hustles as a tutor, dog walker, and rideshare driver, but that income barely covers rent and food, much less health insurance, college loans, or expensive dinners with friends. Her emergency fund is almost gone, and none of her options look good. She considers tapping into her 401(k) instead of using a credit card, but her money-savvy friend warns her about the long-term folly—and short-term tax implications—of doing so. With the possibility of moving back in with her mom looming large, the timing on her reunion couldn’t be any worse. Considerations for the “baby boomer” mom. Her mom is celebrating a reunion this year herself: It’ll be her 40th high school reunion and the first one she’s been to since divorcing her high school sweetheart. They started off as the 50-50 partnership she and her classmates idealized: Dual incomes, common goals, and shared financial responsibility. Then kids came along. When her dad died, her mom needed a lot of support-- so she quit her job. Before long, they found themselves in surprisingly traditional roles. She took over the monthly bills, he made the big picture decisions. Squeezed by their “sandwich generation” duties, talk about money fell by the wayside. It was only through the divorce proceedings that she discovered how little money and savings they had. Now she’s picking up the pieces. Mom is back to full-time teaching and she’s thrilled to be beefing up her pension and 403b. But, thanks to her years out of the workforce and paying for her child’s higher education, she’s got a lot of catching up to do. How does she begin to balance everyone’s needs? Should she sell the now too-big family home? Will she ever retire? Can she afford to hire a financial planner? Can she afford not to? Even though her new job provides her with some financial stability, it’s a far cry from the future she and her high school friends envisioned. A grandmother’s financial obstacles. The matriarch of the family only wishes she were well enough to make it to her upcoming 75th high school reunion. Due to various health issues, she’ll be spending time indoors instead of reminiscing with her few remaining classmates. Together they survived the Great Depression, World War II, and the many boom and bust cycles that followed. Times were often difficult, but they got by. No one had credit cards or financial planners. They simply spent less than they earned and saved in advance for big expenses. She remembers her young husband surprising her with their new home. It wasn’t until he died decades later that she discovered it cost the then-pricey sum of $5,900. That’s the way it was: men handled the money, and that was fine by her. She grew to love that home, and it grew to be worth a hundred times its cost.  The equity is what allowed her to live there. But how much longer can it last? Is it time to move to assisted living? Can she afford it? What about the kids’ inheritance? Progress For Better It’s true that most women share financial concerns unique to their gender. However, as illustrated in this scenario, those concerns can vary tremendously across generations. Even within generations, women’s needs are by no means monolithic. Where once there were prescribed roles and paths outlined for women, the choices are now virtually limitless. Personal finance is evolving in parallel. Yesterday’s safety nets are being supplanted by sophisticated products and planning strategies. The safe, reliable pensions, bond ladders, and comprehensive health insurance of old are giving way to new, more flexible tools of the trade, such as 401k’s, Health Savings Accounts, and long term care insurance. Grandma couldn’t get a credit card in her own name until 1974; in comparison, her granddaughter could have one at her eighteenth birthday.  She might also even have her own Roth IRA and 529 accounts. And, there’s a good chance a robo-advisor is making investment decisions on her behalf. The bottom line: gender gap notwithstanding, today’s woman has all the power to make — or break — her financial future, even though effective use of this power requires much greater financial acumen than generations past needed. Lean into the women-focused personal finance resources that exist. If you decide to seek advice from a professional, be sure that person (and the firm they represent) are considered fiduciaries and are obligated to act in your best interest. Certain online investment platforms hold themselves to this standard and may be a good jumping off point for free educational content and ultimately investment options.

Women and Money: Bridge The Gap It’s no secret that women fight more of an uphill battle than male peers in their efforts to reach personal financial goals. $430,480. That’s what it costs to be a woman, according to the National Women’s Law Center. It’s the wage gap that results from a lifetime of being paid less than men. It’s no secret that women fight more of an uphill battle than male peers in their efforts to reach personal financial goals. That nearly half-million dollar wage disparity may be the best known financial hurdle that a number of women face today, but it’s not the only one. Let’s take a look at what other financial hurdles women face, issues they should reconsider, the opportunities they should take advantage of, and what it will take to bridge the gap. The Hurdles You Should Pay Attention To Earning Money The wage gap women face starts with lower pay for comparable work. More time out of the workforce (15% of working years vs. 2% for men), primarily for family caregiving, compounds the problem. On top of that, when women are fired from their role, they tend to take an average 24% pay cut at their next job, as compared to the 1.3% increase men see. Spending Money: The “Pink Tax” Not only do women often earn less for comparable work, they also tend to pay more for comparable goods and services. This so-called “pink tax” is levied on everything from hair care to healthcare. In some cases, it extends to financial products such as mortgages, business loans, and annuities. The Issues You Should Reconsider How confident are you? A mere 9% of women think they are better investors than men, per a recent study. Traditional gender roles had them showing up late to the party on this, so a case of newbie nerves is to be expected. The problem is that this confidence gap results in reduced risk tolerance. Women wait longer to invest and, when they finally do, they tend to stash larger portions of their money in safer, but low earning, accounts. Compounded over time, this more conservative approach can exact a big toll on women’s net worth. Are you considering your life expectancy as much as you should? According to 2017 Center for Disease Control data, the life expectancy for American women is 81.6 years. This means, on average, women get 5 more years than men to enjoy the good life, whether that’s globe hopping, playing golf, or spending time with the grandkids. But it’s also 5 extra years of living expenses to fund. And some of those additional years can be extra costly as healthcare expenses soar in later life. Thanks to the hurdles faced en route to retirement, women are forced to cover these higher costs with a comparatively smaller pool of resources. That can include: Lower Social Security benefits Reduced pension payouts Smaller nest eggs The Opportunities You Should Take Advantage Of Behavioral Finance Is On Your Side On the plus side, some gender differences work in women’s favor as do demographic trends. For starters, studies show that women are better savers than men.  In particular, they have higher 401(k) participation rates and those that do participate, contribute a higher percentage of pay. Furthermore, behavioral finance research has found that women are also better long-term investors. That’s primarily because, once invested, they are more inclined to “stay the course” regardless of market conditions. Not only does this reduce unprofitable panic selling, it minimizes fees and capital gains taxes. Additional data suggests that this may ultimately result in generally higher rates of return. Shifting Gender Roles Shifting gender roles are affording women more opportunities to leverage those inherent advantages. With 2/3 now acting as primary or co-breadwinner, it’s not surprising that women, and the men in their lives, want to make the most of that hard-earned money. Accordingly, many are eager to learn about financial planning—92 percent according to one study. This hunger for information has spawned a treasure trove of resources. That includes a burgeoning cadre of role models of all stripes, from finally-debt-free millennial bloggers to women CFOs. Watching these prominent women in finance talk openly and confidently about money is inspiring others to overcome cultural barriers and do the same. The cost of ignoring women is finally dawning on the historically male-centric financial services industry. The push to better serve women remains in its infancy, but an estimated $800 billion missed market opportunity is driving it forward. Bridging the Gap When it comes to gender and money, things are moving toward parity with increasing momentum, and there’s a few steps women can take to accelerate the process even more. Here’s how. Just start. Fear of making mistakes often prompts women to delay important financial decisions until fully versed in the matter at hand. While it’s smart to look before you leap, losing out on the magic of compound interest can be just as costly as imperfect execution. Get smart. Financial education is one of the few investments that comes with little to no risk. These days, it’s easily accessible via a startling assortment of seminars, blogs, podcasts, videos, forums, and more—many free or low cost. Take part. Splitting up your money management “To Do” list with a spouse or financial planner makes good sense,  but women should stay intimately involved to ensure their interests are represented. The journey to women’s financial parity is far from over, but the progress has been impressive. And with the collective impact of more and more women taking control of their money, maybe someday “the gender gap” can be relegated to the dustbin of history.

State and Local Taxes Affect Your Wallet There are other types of taxes besides income tax. We’ll walk you through common types of state and local taxes, and provide tips on how you can minimize your tax liability so that you can keep more money in your wallet. Long before I started working in the tax profession, I had my first experience with state and local taxes as a young child. While at the grocery store with my mother, I wanted a pack of gum. It was advertised as $1.00 and I felt pretty energized about persuading my mother to give me a one dollar bill to pay for it. Once at the register, I found out that with the 7% state sales tax in New Jersey at the time, the actual price came to $1.07—and I came up short. Smart investing can help you minimize your tax liability. First, let’s define some of the various types of state and local taxes that you will face. Income tax: Tax that is paid to the state or local authority based on income such as wages, business profits, interest, dividends, capital gains, etc. Wage income is typically subject to tax withholding at the time it is received (and reconciled through annual filing). In contrast, taxes on investment income are typically paid through quarterly estimated payments or at the time of annual filing. Sales tax: Tax that is paid to a local authority on goods and services, typically at the time of the sale. In some states, there may be an exemption for basic necessities such as medicine, food, or clothes. New York City has a sales tax rate of 8.875%, which  is one of the highest in the nation. Sales tax can be funny sometimes. For example, New York does not tax unprepared food like a whole bagel, but one that is sliced for you is taxed. Real estate tax: A tax on the value of owned real estate and property, based on the appraised value. It’s typically paid either on a quarterly basis to the local authority, or through an escrow account as part of a monthly mortgage payment. Excise tax: A tax typically paid at the time of sale on a variety of goods and services such as alcohol, tobacco, gasoline, and gambling. Sometimes these taxes are referred to in the context of “double taxation” because sales tax may also be imposed in addition to the excise tax. The good news is that you can minimize or even avoid certain state and local taxes. Investing in specific types of funds, or in specific types of accounts, can help reduce what you owe. You can even reduce or avoid certain taxes by living in a state with tax laws that help you keep more in your wallet. Treasury bond interest is not taxable at the state level. Most states and localities with income tax requirements look at your federal tax return as a starting point, and then they make adjustments. This means that your taxable income at the federal level might be higher or lower than your taxable income at the state level. One reason your state income might be lower is due to U.S. government interest, because it’s taxed at the federal level but not at the state level. Most of our portfolios here at Betterment contain at least some income from U.S. Treasury bonds, unless your allocation is set to 100% stocks. Municipal bond interest provides double, or even triple, tax benefits. Municipal bonds are another component of tax-smart investing, particularly because the interest they earn is generally not taxed at the federal level. The highest income tax rate at the federal level is 37% plus an additional 3.8% tax on investment income. Reducing what’s taxed helps you keep more in your wallet. Not having to pay any % of income tax on your municipal bond interest can help you keep more of what you earn. But, why settle for one tax exclusion when you can get two...or even three? States generally don’t tax interest on municipal bonds issued within their borders (but they do tax interest from out-of-state municipal bonds), so residents who buy them can typically collect interest without having to pay state taxes. Residents of cities that assess their own income tax, like New York City, could exclude income from municipal bonds issued within their state on their city tax forms, too, resulting in a tax-break trifecta of federal, state, and city tax breaks. New York and California Residents State municipal bonds are most advantageous for those in high-income tax brackets. Our standard portfolio for taxable accounts utilizes MUB, a bond ETF providing exposure to municipal bonds from all states. We offer ETFs that invest solely in either New York or California municipal bonds, for New York and California residents with a minimum balance, or an intent to fund, of at least $100,000. If you want to switch out MUB in your portfolio to CMF or NYF, please email us. We generally recommend making this switch before you fund your account. The state you live in affects how much you’ll owe in taxes. State and local income taxes can significantly reduce the amount of cash you have left after paying taxes—and this varies based on the state you live in. California, New York State, and New York City typically have the highest personal income tax rates in the U.S. California’s highest income tax rate is 13.3% and New York City residents pay up to 12.696%. Note that only New York City residents pay New York City income tax. New Yorkers who live outside of New York City do not pay any New York City income tax, instead, they’ll pay the state up to 8.82%. These rates apply to all types of income unless there is a special exclusion or exemption. The state and local income tax burden has recently increased due to tax reform. The federal tax deduction for all state and local taxes paid by a taxpayer is now limited to $10,000 per year. Distributions From Retirement Accounts Certain states provide a full or partial exemption from state and local taxes for distributions from your retirement accounts. Each state has its own rules and limitations. There are a few states with income tax rules that are generous to retirees. Illinois has a blanket retirement income exemption for withdrawals from 401(k)s, IRAs, pensions, and even for Social Security payments. Pennsylvania has similar income tax exemptions to Illinois but may impose taxes for early retirees. New York allows for each spouse to exclude up to $20,000 from 401(k)s, IRAs, and corporate pension income per year, and also excludes Social Security payments from income tax. California taxes all retirement income at the same rate as the federal government with the exception of Social Security payments, which are automatically exempt. If you move states in retirement, your former state of residence cannot tax your retirement income. Only the new state can, which means you can avoid taxes by moving to a state that generally doesn’t have any taxes on retirement income, like Florida or Pennsylvania. Please note that Betterment is not a tax advisor—please consult a tax professional for further guidance.

The “Best” IRA Rollover Offers Are Not What They Appear Before you bite on one of the “best” IRA rollover offers, it's important to read the fine print and ask yourself a few questions. Financial companies advertise all types of offers to incentivize you to roll over your old accounts. The “best” IRA rollover offers might include free trades, cash bonuses, or even "retirement matches." But before you bite on one of these offers, it's important to read the fine print and ask yourself a few questions. What are their fees—and are they hidden? Money managers don’t offer cash bonuses out of generosity. Often, managers that offer the largest cash bonuses can only afford to do so because it also charges the highest fees. Within a few months, a company will have recouped the entire bonus, but its fees stay sky high. Our recommendation? Do a little math on how much you’ll be paying per year to keep your money with a manager before you take them up on the cash bonus. You’ll likely find that the bonus is a drop in the bucket when compared to the fees you’ll be paying over the five, 10, or even 30 years until retirement. Additionally, the advertised fees are not always the only ones, and any hidden fees tend to be buried. It’s better to learn about them before you commit than to be surprised later. Account closure fees, in particular, are a mainstay in brokerage fine print. You might as well deduct the account closure fee from the cash bonus, as that portion of the bonus is really only a loan from the provider that you’ll have to repay if you decide to leave. 2015 IRA Offer Case Study: Merrill Edge Let’s say you were considering a rollover for your $20,000 IRA and wanted to take Merrill Edge up on its 2015 (the company changes its offers periodically, but you can see their standard cash current offer page here): $100 cash bonus, plus 300 free trades. Merrill’s offer is a typical example of one from a big brokerage. Merrill’s Offer What You Actually Received $100 Bonus Your take-home bonus is actually only $50 after Merrill’s $50 account closing fee. 300 free trades You won’t use all of these trades, as you only have 90 days to use them, according to the fine print.1 (Most reasonable investors make less than 300 trades over three months.) $6.95 per trade after 90 days You could end up paying $312 in your first year alone. While the first three months are free, the next nine aren’t. We assume that in order to reinvest your returns as they come on, and keep your portfolio balanced, you make five trades per month.2 Even if you trade less, you can see how quickly the bonus evaporates. Net of your cash bonus and free trades, you’ll still pay Merrill more than $260, or about 1.3% of your balance, in your first year as a customer. It gets worse from there. In Year 2, without the benefit of the bonus and with commission on every trade, that fee would increase to roughly 2% of your original balance, depending on market changes. Compare that with a Betterment account, which would charge you almost 90% less—0.25% per year. Do I really want this company to manage my money? So, you’ve done the math and know exactly how much you’ll be paying in fees relative to the bonus they’re offering. Ultimately, however, the cost of the product is only one of several considerations when choosing a provider. You should ask yourself these questions before choosing a provider, even if the offer looks like it’s the best one out there. Does the provider offer an adequate level of guidance for your savings? Are you confident that your money is working as hard as it could be? How is the company’s customer service and website? Why Betterment Is Different Before any bonuses, Betterment costs you much less. We typically offer one to 12 months of our service as a free trial, depending on when you sign up, the offer you use, and how much you deposit. If you don’t like our service, you can always move it to another brokerage or wealth manager at the end of your trial, free of charge.3 But we think you’ll stay. Not only are our fees low, but we offer an excellent investment experience—starting with personalized allocation advice for your money, a diversified portfolio of ETFs, and automated portfolio management—all of which is included in our low fee. No extra fees or hidden costs. For a $20,000 account at Merrill, the trading you would need to keep your funds invested and balanced would cost you roughly 2% of your balance in the second year. At Betterment, on the other hand, you would pay only 0.25%, for a savings of $350 for the year. Even as your account grows, the annual savings would remain significant.4 1 From Merrill Edge's original 2015 disclosure: “$0 trades begin within 5 business days of account opening and must be used within 90 calendar days; up to 300 trades per account. $0 trades are only applicable in the new account and are limited to online equity and ETF trades. Standard commission rates apply to trades in excess of the 300-trade limit or after 90 days.” 2 This is a very conservative estimate of how many trades Betterment performs for a customer. If the customer makes ongoing contributions, in addition to needing dividends reinvested, the number is significantly higher. 3 Betterment has no fees for closing an account. If you move investments outside of a rollover you will be responsible for any resulting tax liabilities. 4 We've updated our pricing structure since this article was published. Learn more at betterment.com/pricing. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. The information on this page is being provided for general informational purposes and is not intended to be an individualized recommendation that you take any particular action. Factors that you should consider in evaluating a potential rollover include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account and consult tax and other advisors with any questions about your personal situation.

Is Financial Planning Different For Women? For many women, financial planning is a daunting task that poses risk in the long term if overlooked. According to a recent study by Fidelity, women save 9.0% of their salary annually, yielding an average of 6.4% annual rate of return. In contrast, men save 8.6% of their salary annually, yielding an average of 6.0% annual rate of return. And yet, a breakdown by demographic of the average U.S. savings account balance found that households headed by men save an average of $35,000 per year, while households headed by women save an average of $17,000 per year. Median values are even more skewed: male-headed households save $9,200 per year, while female-headed households save $2,500 per year. Ultimately, women — especially women over the age of 50 — need to both proactively prepare themselves for economic disadvantages as well as unforeseen circumstances like health issues or joblessness in order to help ensure their financial stability. How wide is the gender wage gap? It’s a well-known fact that women make less than men, despite working more – as of 2018, white women make 77 cents for every dollar that men make. African American women make 61 cents on the dollar, and Hispanic women earn just 53 cents on the dollar. Wage gap aside, women also face hurdles when leaving the workplace to care for others, with 1/3 of women returning to the labor force being paid less than they were when they left. Women also tend to spend less time in the paid workforce, with the average woman working an extra unpaid 39 days a year compared to men, and spending 12 years out of the workforce to care for others. Additionally, women tend to live longer (most women expect to live for  25 years after retirement) than men, and are therefore often responsible for saving more retirement income, as well as for higher lifetime healthcare expenses. How does the wage gap impact financial planning? So, is financial planning different for women? Absolutely. These realities make retirement planning a daunting task for many women. On the plus side, recent studies have shown that women are better investors, with an outperformance of around 40BPS per year vs. men. In the same study by Fidelity in which over 8 million investment accounts were reviewed– their conclusion was that women achieved higher returns on average and were better savers from a financial planning perspective. The theory behind this phenomenon is that women around the world are responsible for the operation of the household, which mandates a longer-term view when it comes to planning for the future. These habits are reflected especially in the frequency of churn in a portfolio– men who trade tend to trade 55% more frequently than women. In essence, women tend to earn less-- though they work more-- since much unpaid labor is performed by women. The average woman will lose 12 years in the workforce due to having to take time off to care for others, and face lower wages upon returning. And yet, women will on average spend more time in retirement, which means they must save more than their male colleagues to attain the same quality of life. 3 Financial Planning Tips For Women Women shouldn’t have to suffer negative financial consequences for looking after their family or derail their retirement plans for having one. The overall lower lifetime earnings makes it critical for women, especially, to invest intelligently and make wise financial planning decisions from the very start. Aside from ongoing social forces seeking to have women’s unpaid and underpaid labor recognized and compensated, there are tangible actions that women can take to prepare for the financial realities they face. Secure access to financial advice. Financial planning is a difficult project to tackle alone- that’s why advice in this industry is so valuable. Traditionally, when finances were largely handled by men, women had little to no access to financial planning resources, or to an advisor. This clearly presents a huge obstacle to a woman’s financial independence and security, especially if the man exits the household. Thanks to the progress we’ve made in this sector over the last few decades, financial advice is now easily accessible to anyone. Learn more about what Betterment offers. Maintain a DIY financial plan. While an advisor is certainly a valuable and often necessary ally when it comes to finances, the final responsibility for our financial health still falls on us. It’s important to know where to start your financial plan in various areas of your life- for example, you would save for retirement much differently than you would save for a new car, a child’s education, or for medical expenses. There is no one-size-fits-all solution to staying on track for retirement, but Betterment can help you make better sense of the pieces you need to know. We take into account taxes, inflation, your risk appetite, investment horizons, and other personalized factors that change the way you should invest. Learn more here. Know the consequences of costly financial mistakes. Because many women don’t save enough for their own retirements and also often have the social obligation of caring for others, this can lead to an emergency need for readily available cash. Early Withdrawals From Retirement Accounts During these times, it can be very tempting to, for example, withdraw from a retirement savings account, such as a 401(k), to fund other expenses. However, actions like this could lead to negative tax consequences, and ultimately deplete the savings at a faster rate. In this instance, withdrawing money from a tax-deferred account before age 59.5 triggers a tax penalty of 10%, and regular income tax has to be paid on the entire amount of the withdrawal- essentially eroding the value of the contribution. Being aware of the caveats of early and one-time withdrawals is important, but another way you can avoid costly early distributions is to build a sizable emergency fund so that you're prepared in case anything unexpected happens, such as a medical emergency or job layoff. The Simple Truth During this Women’s History Month, it’s worth reflecting on how far women have come in taking charge of their financial futures and addressing social issues that leave them vulnerable to risk in the long term. However, despite this progress, there are still improvements to be made. By being mindful of the financial and economic gaps they face in comparison to their male counterparts, women can take the necessary steps to help prepare themselves for a successful, secure future.

How Banks Fail in Helping You Save Money You may not realize it, but our financial lives are shaped by a great divide: banking vs. investment managers. In between lies most people’s pinnacle challenge: saving for the future. I have the good fortune of being able to question the institutions that shape my financial life. I studied economics in school. I earned a CFA credential while working in consulting. I started a financial tech company when I found problems that the industry seemed content to leave unsolved. But not everybody can afford to question the institutions they work with. To most Americans, the bank is the bank. It’s where you put your paycheck, who you talk to for a car loan, what form you look at when you file your taxes. Your 401(k) is your 401(k); who provides it, what the investments are, what fees are charged—these are questions that most people only get to ask on occasion, if they ask them at all. Today, I see millions of people tied to two kinds of institutions often misaligned to their needs. The first is banking. Neither banks nor credit unions have a fiduciary duty to put their clients’ interests first. Instead, they have a proclivity for charging extra fees and an unjust ability to earn profit on the rates loaned out by the Federal Reserve as their clients lose their savings to inflation. The second is investment managers. Whether a 401(k) plan, an advisor, or a broker, investments are still designed mostly for institutions and the wealthy, and the managers are often far too focused on asset allocation when Americans’ real financial outcomes are most determined by savings. While I have critiques for each group, the greatest problem to me is the fact that there are two. Somewhere in between their bank and their investment manager, Americans lose out on the most important element of finance: Saving their cash. Make no mistake; your savings is what matters. It’s what matters when paying down debt. It’s what matters for starting a business. It’s what matters for securing a healthy retirement. And yet, banks typically don’t help you become a better saver; they encourage holding cash at the ready for spending and sell you loans when you don’t have enough. Meanwhile, most investment managers pay little attention to your saving; they focus on larger deposits, like retirement money withheld from a paycheck. Between working with a bank and an investment manager, we, as a nation, fail to save enough for the things we need. The everyday American deserves a cash advisor. The truth about the future is that saving is all we have. Younger generations can’t count on Social Security the way Baby Boomers still do. And the pension plans of yesteryear are gone. Not only that, students today are graduating with more student loan debt than ever before, and no other part of life is becoming cheaper. Houses, cars, kids—they’re all becoming more expensive, not less. The average American aged 35-44 has $133,100 in debt according to Money. As a nation, we’re mostly deep in the red, not the black. To avoid debt, to save enough for retirement, to successfully navigate inevitable emergencies, Americans need a partner who has their best interests at heart not just in investment advice but for managing their cash. For helping you manage the day to day, so that, at the end of the month, you’ve actually saved more for the future. We need a cash advisor perhaps more than any other kind of financial advisor. For years, RIAs have encouraged their clients to outline their financial goals, to set a budget, and to save enough to fund each of their goals. But what have we been able to do to help ensure our clients’ success? Coaching, support, suggestions—yes, RIAs have led in this arena. But is it working? Americans today are saving less than they ever have. And even worse, they’ve seen limited wage growth and increasing inequality at the same time. Forget budgeting. Cash advice must automate the act of saving. What investment managers and banks silently have agreed on is that saving each month is the client’s responsibility. It’s the client’s money, and so, it’s theirs to set a budget. To me, the suggestion to “set a budget” is a failure of advice. It implies a lack of empathy for how a wallet really works or how human minds decide to spend. These are the facts: The world gives us many reasons to spend, and it offers far fewer reasons to save. Store sales. Credit card rewards. Low interest rates. The world creates many reasons to buy things. Meanwhile, no part of the industry solves saving. Banks and investment managers leave it to their customers to solve. The solution is having an advisor that puts the work in to do what real humans struggle with: Automating your savings. Helping to keep your spending in check. And nudging you toward your long-term goals. Ask any financial engineer and she’ll tell you that predicting the right level of cash you need each month is no great feat. As predictive modeling and advanced technology goes, your cashflow isn’t a big mystery. The choice to build that business so that everyday Americans can live better? Now, that is a different story. America’s future depends on how we save cash. Who will solve it? You can look at national debt, student debt, Social Security insolvency, or growing income inequality. As a country we need ways to help people save, and so far, the answer I see suggested most is Mint, a budgeting tool from Intuit that only helps if you’re already good at budgeting to begin with. And if you’re not, it mostly serves to sell you credit cards or investment apps. And I don’t blame Mint; it’s great for budgeting, just not for the reality of saving. Will you trust a bank to help? Maybe one of the new online banks or app-based banks? Banks have every opportunity to change how we save for our goals, and yet, they won’t. They thrive when you’re using your debit cards and taking out loans. They love it when your savings sit growing at less than 1% while they’re loaning your money at 4%. When we, as a nation, need every ounce of the risk-free rate we can get to save for our goals, banks prove again and again that they’re not problem-solving, they’re taking advantage. So, who would you rather work with? The solution I see is that we have to turn to those whose interests align with our own. I want to see fiduciaries get into the business of managing cash and savings. I want registered investment advisors and CFP® professionals to become true cash advisors. To use innovative technology at scale. Yes. To drive empirically better behavioral outcomes. Absolutely. To make a profit. It’s a must. But, at the core, we need advisors acting in their customers’ best interests; not just for already-wealthy individuals, but for everyday Americans looking to save their way to wealth.

How I Managed My Financial Goals When I Got Married There are many different ways to manage money as a couple. The key is to have open communication, sooner rather than later. A few months before the wedding, one of my groomsmen asked me if I had thought about how my fiancée and I would combine finances. It sparked an interesting conversation, as he and I then realized we had very different views on the best way to manage money as a couple. Of course, every relationship is different and there is no silver bullet for reducing money-related stress within a partnership. However, we consider ourselves lucky to have found a system that works well for us early on. After all, a study found that financial problems were cited as a cause for the breakdown of relationships by at least one of the partners in 56% of divorced couples — a sobering statistic to be sure. In this article, I’ll share some of the personal finance practices that worked well for my wife and me: proactive budgeting, allocating every dollar in our budget to a goal, and speaking openly and often about our financial priorities. Here’s what worked for us: We quickly decided to join our finances. My wife and I met in college. After a few months of dating, we both knew we were in the relationship for the long haul and our approach to finances changed radically. Even before we moved in together, we made it a point to foster a philosophy of “what’s mine is yours.” One common way couples manage their finances is to set up a joint account from which all bills are paid, and each partner keeps a separate account for “mine” and “your” spending. In contrast, we approached budgeting in almost the exact opposite way— every expense was “ours,” and we also set our budgeting goals together. One month I might have needed a suit for a job interview and another month she might have needed some repairs done to her car. Either way, we considered both of these expenses as shared, and didn’t keep track of who paid for what. Of course, this approach might have complicated things if our relationship had not turned out as well as it had. If we had broken up a few months into our relationship, one of us may have felt cheated by the fact that more expenses were paid for by their account. However, I credit our approach to finances as part of the reason why our relationship was so solid in the first place. I don’t think my wife and I have ever had an argument about our finances, and by setting common goals and budgets early on, we were able to avoid one of the largest relationship stressors. 3 Tips For Managing Joint Finances Our strategy for managing finances has remained mostly the same since our college days. For budgeting, we use the envelope system, which relies on giving all of your cash a purpose. Every cent that flows into one of our accounts is earmarked for a specific need. One very tedious way of following this technique is to keep all your money in cash, and physically store it inside separately labelled envelopes (hence the name). If the grocery envelope has $100 on it, then that’s your budget for groceries until you have more cash inflow to distribute among your envelopes. Of course, you can simplify this system by having software track your cash digitally. 1. Develop a proactive vs. reactive budget. First, our budget is proactive rather than reactive. Many popular budgeting apps aggregate your transactions and let you see how much money was already spent on what, but they don’t actually help you plan out your future goals. We use the app YNAB, though a simple spreadsheet could get you most of the way there. Keeping track of your spending in such detail may sound taxing, but it has many benefits. By giving every dollar a job, we know what our spending will look like ahead of time, and we can focus on saving for the long-term. 2. Adopt the “envelope” system. Secondly, the envelope system helps you smooth out seasonal spending patterns over time. For example, we have a dedicated category for Christmas gifts to which we allocate a few dollars every month. Though buying holiday gifts may not seem top of mind in February, allocating to that category year round means that once December rolls around, we have a full “digital envelope” of cash solely dedicated to buying gifts. Though the physical spending may vary month-to-month, the amount we contribute to each category is very steady. I think of this as almost like a self-sponsored credit card, where we have low monthly payments every month, instead of a large payment all at once. 3. Speak openly and frequently about future priorities. Thirdly, taking a proactive approach to budgeting means that my wife and I regularly have conversations about our hopes and priorities for our finances. A budget that summarizes what you spent last month will do very little to make you think about your future goals, but our budget has categories for things like future vacations, a home-purchase, and school fees for children we don’t even have yet. Strange as it sounds, I think we’ve had some of the most enriching conversations of our relationship while doing our budgeting. There is no one-size-fits all solution for how to manage finances as a couple. Indeed, even initiating the conversation about managing money can be daunting. Yet, since communication is key, I remain a firm believer that early, open conversations about what works best for you and your partner are not only critical for the relationship but also an incredible opportunity to work towards your dreams, together. Whether you choose a proactive budget or a reactive budget, whether you begin merging your finances sooner or later (or at all), and whether you review and adjust your approach often or occasionally, take the fear out of talking money. More than anything, budgeting together is an opportunity to discuss what is most important to you—a chance to start on a path towards goals for which you are excited to reach together. Some might say those are the very best parts of a relationship.

This Is Why an ETF Portfolio Serves You Better ETFs are the next level in access, flexibility, and cost. Here’s a look at the five key attributes that make ETFs right for Betterment customers. When we first started Betterment, our goal was to create the best possible portfolio for investors. To do this, we had to take into consideration cost, performance, and access. We needed products that could suit investors saving for a down payment on their house, major purchases and, of course, retirement. Given all of these stipulations, it’s no coincidence that exchange-traded funds or ETFs make up the core of Betterment’s portfolios. First developed in the early 1990s, ETFs now account for $1.7 trillion in assets in the United States. Betterment selects the most appropriate ETFs for our clients to build a fully diversified, global investment ETF portfolio. While registered investment advisors have been building portfolios of mutual funds for clients for decades, ETFs are the next level in access, flexibility and cost. Here’s a look at the five key attributes that make ETFs right for Betterment clients. Low cost Most ETFs are index funds, aiming to deliver the performance of a stock, bond or commodity index, minus fees—no more, no less. These funds don’t have managers who are paid to “deliver alpha” or market-beating returns. Instead, ETF portfolio managers are quantitative disciplinarians with a laser-like focus on hugging the index. The cost of an ETF covers licensing the index from a data publisher, paying administrative fees (lawyers, trusts, exchanges) and compensating the managers, who tend to work on multiple ETFs at once. All of this is bundled together into what is known as the expense ratio. In contrast, many mutual funds—particularly those that are actively managed—add costs through distribution agreements with brokerage platforms or financial advisors, and some are only available direct from the manager. With ETFs, the gatekeepers (and toll takers and middlemen) have been marginalized, allowing greater benefit to accrue to the end investor—you. For individual investors who want to build a portfolio, basic stock and bond index ETFs tend to be cheaper than equivalent index mutual funds. Consider the price difference between Vanguard's Total Stock Market ETF (VTI) and equivalent mutual fund (VTSMX). They both follow the same CRSP U.S. Total Market Index, but there is a significant cost difference. VTI has an expense ratio of 0.05% and VTSMX has an expense ratio of 0.17%. The expense ratios for the ETFs used by Betterment range from 0.05% to 0.40%. For individual investors who want to build a portfolio, basic stock and bond index ETFs tend to be cheaper than equivalent index mutual funds. Diversified Most exchange-traded funds—and all ETFs used by Betterment—are considered a form of mutual fund under the Investment Company Act of 1940, which means they have explicit diversification requirements. They do not have any over-concentration in one company or sector, unless called out specifically in the fund offering prospectus. Diversification, both within a fund and throughout a portfolio, has been said to be the “only free lunch” in finance. This is what drives Betterment’s focus on asset allocation, ensuring that our clients aren’t overly exposed to individual stocks, bonds, sectors or countries. Tax-efficient All mutual funds are required to distribute any capital gains to their investors at the end of the year, regardless of individual trading activity or the timing of a purchase—these are distinct from capital gains you would realize from selling the share of the fund itself. That means you could buy a new fund in December and receive a taxable distribution just a week or two later! But when it comes to tax efficiency, ETFs have two jewels in their crown. First, most ETFs already have the tax efficiency of index funds—which don’t tend to generate internal capital gains due to churning (frequent buying/selling of stocks and bonds due to investor or manager movement). Second, the two-tiered market by which shares of ETFs are transacted isolates investors from additional tax consequences and limits capital gains from accumulating within the fund. Because an ETF is a type of mutual fund, shares can only be issued or redeemed through a fund administrator, once a day at Net Asset Value, like every other mutual fund. Yet ETF shares trade all day long in transactions between buyers and sellers: How do these sync? When large investors or market makers, known as authorized participants, notice an imbalance between the price of the ETF and the aggregate of the prices of the underlying securities the ETF tracks (or they need to fill a large order of ETFs for a customer), they essentially swap the underlying stocks or bonds for shares of the ETF, or vice versa. This transfer in (or out) of the fund is known as “in-kind” and limits the tax consequences for the fund by allowing it to constantly raise its cost basis of individual securities by swapping out the securities with the largest built-in gains first (swaps, as opposed to sales, don't realize the gains.) In the event that the fund needs to sell securities itself, having a high basis would limit its tax liability. Non-ETF mutual funds don't have this luxury. Flexible ETFs are the duct tape of the investing world. They can be accessed by anyone with a brokerage account and just enough money to buy at least one share (and sometimes less—at Betterment we trade fractional shares, allowing our customers to diversify as little as $10 across a portfolio of 12 ETFs.) While most ETFs are straightforward in their exposure, they are used in so many ways, that they have become an essential tool for all kinds of investors—short-term traders and long-term investors alike. This versatility as an investment vehicle helps keep ETF pricing true to the price of the underlying assets held by the fund. Sophisticated ETFs take advantage of decades of technological advances in buying, selling and pricing securities. Alongside their modern structure sit myriad data points watched by investors and advisors who are constantly analyzing the funds and their investments to make sure that the fund prices stay true. They are looking at what they know about the portfolio, what is happening in the market, and how the ETF is trading throughout the day. The net effect: multiple market forces keep the ETF trading in-line with the underlying holdings.

5 Common Roth Conversion Mistakes Converting your Traditional IRA to a Roth IRA can be a useful strategy for many investors. However, mistakes along the way can cost you—we’ll help you avoid them. Taxes are treated differently between Traditional and Roth IRAs. Traditional funds are taxed at retirement, whereas Roth funds are taxed when you put them into your IRA. Transferring funds from a Traditional IRA to a Roth IRA is called a Roth conversion. With a conversion, you are essentially changing money that hasn’t been taxed yet into money that has been taxed—and paying the resulting taxes due from the conversion. There can be many reasons for why you may want to go ahead and pay taxes in the present rather than in the future. In this article, we’ll focus on several mistakes that can occur when performing a Roth conversion. These mistakes are common enough that anybody contemplating a Roth conversion should be aware of them. Since Betterment is not a tax advisor, please consult a tax advisor if you have questions on how a Roth Conversion would affect your specific tax situation. See step-by-step instructions for converting your Traditional IRA to a Roth IRA. 1. Convert Too Late Most of us don’t think about taxes until April, when we have to actually file. However, by waiting this long to convert from a Traditional IRA to a Roth IRA, you may be paying more taxes than you need to. Remember that you only pay taxes on the amount you convert. Let’s say you convert $10,000 in January and it grows to $11,000 by the time you file your taxes in April. You still only pay taxes on the $10,000. Had you waited until tax time, you would have had to pay taxes on $11,000 instead. As with many things, it pays to plan ahead. If you plan on doing a conversion, do it as early in the year as possible—preferably in January, in order to give your money the longest amount of time in the market as possible so that it can grow tax-free. 2. Convert Too Much Roth conversions can be a powerful strategy, but blindly converting can end up causing more harm than good. A common strategy used to avoid paying more in taxes than you may have to is called “bracket filling.” You determine how much room you have until you hit the next tax bracket, and then convert just enough to “fill up” your current bracket. For example, if you are married filing jointly and have taxable income of $100,000, then you have about $71,050 of room before jumping from the 22% Federal tax bracket to the 24% bracket. It’s worth noting that certain state tax rates can be impacted as well and the rules vary state to state. Converting any more than what you have left to fill up your current tax bracket would likely cause you unnecessary taxes. You can work with your tax preparer to find exactly how much room you have and how much to convert. 3. Convert Too Little On the other end of the spectrum, many people are too conservative when calculating how much to convert and end up missing out on valuable room in their tax brackets. To be clear, going into the next bracket is probably not what you want to do. However, nobody knows exactly what bonus they’ll get, or how many dividends they will receive, so guessing the exact dollar amount is impossible. Since we no longer have the luxury of undoing a Roth conversion, it’s more important than ever to take extra care when running the numbers. If most or all of the Traditional IRA is comprised of after-tax contributions, delaying or avoiding a conversion may only increase the taxable earnings later. See Smart ways to minimize taxes on a conversion. 4. Keep the Same Investments Conversions can be a great tool, but don’t stop there. Once you convert, you should also adjust your portfolio to take advantage of the different tax treatment of Traditional and Roth accounts. Each account type is taxed differently and many investments grow differently, too. You can take advantage of this by strategically coordinating which investments you hold in which accounts. This strategy is called asset location and can be quite complex. Luckily, we automated this strategy through our Tax Coordination feature. Pairing asset location with Roth conversions can help supercharge your retirement plan even further. 5. Pay Taxes From Your IRA Paying any taxes due from the conversion out of the IRA itself will make any Roth conversions you do less effective. If you convert $10,000 and are in the 22% tax bracket, you will owe $2,200 in taxes. One option is to pay the taxes out of the IRA itself. However, this will mean you paid taxes on $10,000 but only have $7,800 left to grow and compound over time. If you are under the age of 59 ½, the withheld amount will also be subject to a 10% early withdrawal penalty. Instead, consider paying taxes owed using excess cash or a non-retirement account you have. This will help keep the most money possible inside the Roth IRA to grow tax-free over time. Step-By-Step Instructions We recognize that many investors are interested in this technique, so we’ve created a quick process that allows an investor to authorize a Roth conversion online in less than a minute. Log in to your account on a web browser. Click on Settings in the menu on the left-hand side of the page. Click the Accounts tab at the top of the page. Find your Traditional IRA and click the 3 dots that appear off to the right. Choose the option that says “Convert IRA to Roth.” You’ll have the option to convert either a partial amount or the full amount. For questions regarding whether or not converting is the best option for you, please consult a tax advisor, as Betterment is not a tax advisor and cannot provide tax advice for your specific situation.

3 Time-Sensitive Tax Moves to Consider this December Tax planning can help you make the most of your hard-earned money, and December is a great time to do it. December is a great time to plan your taxes. Why? Because most of your 2018 numbers are now known, and you still have time to take actions that can reduce your tax bill come April. What’s different about 2018 is that it’s the first year after the tax reform bill, the Tax Cuts and Jobs Act of 2017. That means the experience of filing your taxes may feel different than past years. The good news is there’s no better time to plan your taxes than December, and most strategies still apply even after the reform. Here are three tax moves to consider this December. 1. Finish up your contributions to your IRA, HSA, 401(k), or 529 plans—better yet, max them out. For many taxpayers, the most straightforward way to lower your current year tax bill can be to contribute to a tax-deferred savings account such as a Health Savings Account (HSA), traditional IRA, 401k, or 403(b). If you aren’t sure whether or not you’ve hit the 2018 limits (up from 2017), however, check the rules twice. Did you reach the age 50 at any time during 2018? If you have, you get extra catch-up contributions to your retirement plan. For HSAs, you’ll have to wait until age 55. With 529 plan contributions, there’s no federal tax deduction, but you might get a break on state taxes. Either way, last year’s tax reform bill offers new incentives to consider a 529. Specifically, you can take a tax-free withdrawal of up to $10,000 annually for qualified elementary and secondary school costs. 2. Sell, convert, or gift your investment gains and losses, time shifting your taxable income. Time shifting taxable gains and losses on the sale of investments is another tax planning method to consider. When settling up your bill with Uncle Sam, it’s often a question of “pay me now or pay me later.” This strategy has you explicitly choosing now versus later depending on tax implications. Based off of your income this year, you might benefit from tax loss harvesting.  This is the practice of deliberately selling losing investments in order to use the loss on that sale to help offset other income, thereby reducing taxes. Some services are even doing this automatically for you throughout the year.  If you don’t use automatic tax loss harvesting, you have until year end to do it manually. If your taxable income is $38,600 or less ($77,200 for married couples), you might consider harvesting gains instead of losses. That’s because a portion of your profit may be subject to 0% long term capital gains tax rate. If you don’t qualify for the 0% rate and you have appreciated assets, your tax-planning options could involve transferring these investments to others. If you hold the assets for life, you could enable heirs to receive a step-up in basis. When they sell, they can avoid taxes on the gain the investments saw during your lifetime. Alternatively, you could donate the appreciated assets to a qualified charity or donor-advised fund, which may net you an immediate tax deduction. Since the charitable contribution is not subject to capital gains taxes, more of the value is preserved for the cause when the investments are sold. You may also want to consider doing a Roth conversion for time shifting taxes due on investment gains. Let’s say that over the years you’ve been contributing to tax-deferred retirement accounts. The usual course of action is to let these investments grow tax-free, and withdraw them in retirement when you expect to be in a lower tax bracket.  But suppose your 2018 income is unusually low (e.g. you took unpaid leave). That—plus the generally lower rates of the tax reform bill—may mean you are subject to a low tax rate. This means that it may be to your advantage to convert some or all of your traditional retirement savings to Roth. It’s worth noting that in the past, investors had the option to change their minds and undo Roth conversions. With the new tax reform bill, however, Roth recharacterization is no longer permitted. 3. Shift your expenses to bunch your deductions. Investment gains and losses are not the only elements of the tax planning equation that can be time shifted. Delaying or accelerating other income and expenses is also a popular strategy. Examples include pushing bonuses to January, prepaying education expenses, and “bunching” itemized deductions. “Bunching” is the practice by which taxpayers consolidate as many deductible expenses as possible into a given year. The goal? To make the most of itemizing rather than taking the standard deduction. Historically, this meant controlling the timing of things like medical expenses, state and local taxes, mortgage interest, property taxes, and charitable giving. The new tax law is expected to change all of that since it nearly doubled the standard deduction. As a result, few will qualify to itemize going forward.  Tax preparation may be simpler, but some taxpayers may end up owing more, including: Homeowners subject to new limitations on home mortgage interest deductions Residents with higher state and local tax rates, because the federal tax deduction for state and local taxes is now capped. Similarly, many miscellaneous itemized deductions have been disallowed. Bottom line: the benefit of bunching deductions has been severely curtailed.  The exception, appropriately enough during this season of giving, is charitable contributions. Here, careful planning still has the potential to help ensure a happier holiday and tax time for you and the lucky recipient. Move quickly before the end of the year, but talk with a professional. It’s the most wonderful time of the year for income tax planning. But as we’ve seen, tax law changes, limitations, and interdependencies between provisions make it something of a tricky business. It’s crucial that you (or your tax advisor) run projections to help you see the intended benefits and quickly—like holiday sales, the window on this opportunity closes fast. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

Why The Turbulence In The Stock Market? Turbulence in the market is normal, especially given several economic precursors that have some explanatory weight on the recent market trends. You’ve probably heard it on the news—we’re “entering the second week of a stock market sell-off.” By midday on Monday, the Dow Jones Industrial Average shed 1,000 points. Such a shift in direction after 12 months of record highs has caught many people off guard. And some investors’ internal alarm bells are ringing. It’s reasonable at this point to start asking questions: Why is the market performing this way now? Is there a legitimate reason to be worried? What causes a stock market sell-off like this? In the midst of the market turbulence, today we’ll peel back a few layers and look at several indicators for why the stock market may be behaving the way it is. 3 Economic Precursors to 2018’s Recent Market Changes 1. The Fed may raise interest rates faster than previously expected Since the economic recovery after the recession of 2009-10, the Federal Reserve has started increasing interest rates. In 2017, we saw rates increase. Analysts expected rates to rise in 2018 as well; however, recent economic data, as well as a new Fed Chairman, caused investors to worry that interest rates may rise faster than previously anticipated. Since we’re near full employment (according to the U.S. Department of Labor)—January’s 4.1% unemployment rate is the lowest in 17 years—and one estimate of the United States’ GDP growth was up to 5.4% in the first quarter (compared to 3% growth in previous years), the Fed has several indicators that the economy is healthy and may not need as much monetary support. It’s no surprise that rates would rise after being at record lows; however, expectations about how fast and how much they will rise may have changed. 2. Increased rates mean companies have financial adjustments to make. When interest rates rise, there isn’t just a market reaction; it has real consequences for how companies operate. Rising interest rates can make it more expensive for large public companies to borrow money. That added expense often has an impact on the valuation of those companies that end up borrowing at a higher cost. Their bottom lines change, and so do their valuations. When bond rates are rising, however, that doesn’t mean that the stock market automatically goes into free fall. Learn more about what bond rates rising have meant historically. 3. The possibility of rising inflation can lead to market hesitance In historical scenarios, strong GDP growth and rising interest rates have led to increased inflation—i.e. the cost of products and services inches upward. In recent years, inflation has been below 2%, but as the economic environment changes, some investors might be reacting to a possible rise in inflation, even though a slight rise in inflation need not necessarily mean lower returns. Is a market sell-off a bad thing for investors? The three points above can help us understand the recent change in market direction, but they don’t necessarily predict anything about the future. The recent turbulence stands as a good reminder that, as investors, we are compensated for taking risk, and that the path to higher returns is seldom a straight line. In times of increased volatility, investors should be sure to focus on the things they can control, like how much they’re saving and whether they are properly maintaining appropriate levels of risk for their goals. As we see changes in economic mechanics, as influenced by the Fed or other factors, market reactions in multiple directions are bound to occur. When investing, the key is to remember that holding for long-term growth, riding along market changes up and down is part of how you can reach long-term returns.

The Economy’s Performance vs. the Stock Market’s Outcomes What the economy is doing today tells you very little about what the stock market might do tomorrow. Today’s the 30th anniversary of the Crash of 1987. A common time for people to look at the stock market and wonder what comes next. Here’s one of the strangest and most frustrating things about investing: What the economy is doing today tells you very little about what the stock market might do tomorrow. Go back to January, 2010. President Obama summed up the state of the economy in his State of the Union Address: One in 10 Americans still cannot find work. Many businesses have shuttered. Home values have declined. Small towns and rural communities have been hit especially hard. And for those who'd already known poverty, life's become that much harder. This wasn’t hyperbole. The economy was about as bad as it had been in 30 years. Investors witnessing the pain inflicted on businesses and consumers at this time could say, “The economy is a mess, so I don’t want to invest in the stock market.” I wouldn’t blame them. That makes rational, logical sense. But the S&P 500 is up more than 200% since that speech. The market’s average annual return since 2010, at nearly than 13% per year, is about 40% higher than the long-term historic average. It was one of the best times to invest in modern history. Now go back to January, 2000. President Clinton summed up the state of the economy in his State of the Union Address: We begin the new century with over 20 million new jobs; the fastest economic growth in more than 30 years; the lowest unemployment rates in 30 years; the lowest poverty rates in 20 years; the lowest African-American and Hispanic unemployment rates on record; the first back-to-back surpluses in 42 years; and next month, America will achieve the longest period of economic growth in our entire history ... My fellow Americans, the state of our Union is the strongest it has ever been. This wasn’t hyperbole either. The economy was about the strongest it had ever been. Investors witnessing the strength of businesses and consumers at this time could say, “Everything's going right. Now is the perfect time to invest.” I wouldn’t blame them. That makes rational, logical sense. But three months after this speech the market peaked, and began one of the worst three-year periods in history. The S&P 500 fell nearly 40% by the end of 2002. It was one of the worst times to invest in modern history. Researchers at the Vanguard Group once crunched historical numbers to show how economic numbers like GDP growth, interest rates, government debt, corporate profit margins, and earnings growth correlated with stock market returns over the following year and 10 years. The answer for virtually every metric was: They tell you almost nothing. There is a huge disconnect between economic performance and stock market outcomes. There is a huge disconnect between economic performance and stock market outcomes. “Many commonly cited signals have had very weak and erratic correlations with actual subsequent returns, even at long investment horizons,” the researcher wrote. Things like GDP growth and interest rates in one year had literally zero correlation to what the stock market might do over the following year. One Vanguard researcher with a sense of humor tested the correlation between nationwide rainfall and subsequent stock market returns. It was actually a better predictor of what the stock market will do next year than things like GDP growth, earnings growth, and analysts’ estimates of future economic growth. The stock market is driven by a combination of companies earning profits and changes in investors’ moods about those profits. The latter is the most important driver, especially in the short run. When investors get optimistic they pay more for $1 of corporate earnings than they do when they’re pessimistic. And those mood changes often have no connection to what the economy is doing at the moment, for two reasons: One, moods are driven by hormones rather than data, persuaded by things like herd mentality and the fear of missing out. Two, moods look ahead to the future, anticipating what might happen next year with little care about what’s happening now. That’s likely why stocks performed so well in 2010 when the economy was doing so poorly. Investors were looking ahead at what might happen to company profits in 2011 and beyond. And the apparently felt pretty good about it. The point isn’t that investors should pay no attention to what the economy’s doing. But be careful when letting the view of what’s going on around you today guide what you do with your investments today. Instead, try to let two questions steer your thoughts about the market: Your individual goals. How long can you stay invested for before needing this money? Your tolerance for the market’s ups and downs. Are you able to handle the psychological sting of normal market volatility, particularly in the context of how long you can stay invested for? Those won’t tell you what the market might do next. But they’ll help you, as an investor, form a rational plan in a world where the economy’s influence on the stock market often seems to make no sense.

Why The Fiduciary Rule Matters The fiduciary rule will help to ensure that financial institutions act in investors’ best interests when providing retirement advice. The U.S. Department of Labor (DOL) has now finalized its “fiduciary rule,” which is a positive development for anyone saving in a 401(k) or Individual Retirement Account (IRA). Under the new rule, anyone who provides retirement investment advice for a fee will be considered a fiduciary. Fiduciaries are required to act in the best interests of the investors they serve. Betterment has long been a supporter of the DOL fiduciary rule. We believe it is a step toward improving retirement outcomes for millions of Americans, because it will help eliminate problematic practices in the retirement advice industry. The rule is part of the industry’s shift toward ensuring that everyone receives unconflicted fiduciary advice. How the Rule Impacts Investors Many investors are unaware that their retirement account managers and advisors are currently under no obligation to act in their best interest. Investors are also often unaware of the fees they are charged, because those fees may be hidden in the fine print. Once the new rule is implemented, investors will receive additional disclosures regarding fees, compensation, and potential conflicts of interest when they receive investment recommendations concerning their retirement accounts. The fiduciary rule should also help prevent instances of product steering, which occurs when brokers and advisors direct clients to invest in more expensive investment products—including their own branded products—over others. How the Rule Impacts Advisors, Brokers, and Account Managers Opponents of the rule cited implementation costs, such as the costs to retrain advisors or update legal procedures and technologies, as a reason to not support it. They also argued that, if forced to abide by the fiduciary rule, they would no longer find it economically feasible to provide services to lower-balance accounts. But we believe the rule’s opponents actually pushed back because they wanted to preserve an outdated status quo—one that did not always put customers first, or prioritize transparency, innovation, and unconflicted advice. In plain speak, opponents were focused on the potential impact that the fiduciary rule would have on their bottom lines. In our open letter to the Department of Labor, we addressed these arguments. We explained that technology allows modern, independent advisors like Betterment to provide affordable fiduciary advice to customers at every level of wealth. The fiduciary rule does not affect how Betterment manages customer assets, because we have long been committed to acting in our customers’ best interests. Our transparent pricing is our only source of revenue, which is not affected by the ETFs that we recommend in our investment portfolios. Betterment is hard at work bringing our unconflicted, next-generation service to millions of customers. Our aim is to help investors reach their short- and long-term financial goals, and our customers can easily navigate their accounts to see if they’re on track to do so. They know where they stand, and in which accounts they’re invested, at all times. We’re optimistic about the DOL’s rule-making and what it represents. We built Betterment as an alternative to the conflicted, sales-driven business models that previously dominated the market for retirement advice. We applaud the DOL for finalizing the fiduciary rule, and for recognizing that an unconflicted approach will create better outcomes for investors.

Why Your Index Fund Has a Different Return Than Its Index When it comes to your returns, indexes matter. But the fund you choose to mimic that index matters even more. Index funds are turning 40 this year, but they’re hardly over the hill. In fact, quite the opposite—investors are investing in them now more than ever. In 2014, investors poured $250 billion into U.S.-listed index-tracking exchange-traded funds (ETFs), shattering the 2013 record inflow of $188 billion. Market share paints a similar picture. In 2014, traditional index funds and ETFs made up a quarter of total bond and stock fund assets, compared to just 1% in 1990. Index Funds: Assets and Market Share Investors use index-tracking funds because they’re typically cost-effective, transparent, easy to use, and give investors access to their preferred indexes, such as the S&P 500. But many investors are confused when their index return doesn't match that of the index it's tracking. What they may not know is that the index itself is just one factor to consider when choosing a fund. It's also important to look at an array of characteristics, including degree of turnover, frequency of rebalancing, how reasonable the expense ratio, and transparency of fee reporting. A Quick Guide to Indexes An index is nothing more than a basket of securities. The way indexes differ from each other is how they select and assign importance (i.e., weight) to those securities. For example, the S&P 500, an index that’s made up of the largest 500 publicly traded companies in the United States, weights its securities by market capitalization. So, if Apple makes up 5% of the total size of those 500 companies, then it gets assigned a 5% weight inside the S&P 500 index. Similarly, the CRSP U.S. Total Market Index is weighted by market cap, but instead of including just the top 500 companies, it includes nearly all publicly listed U.S. stocks. While you can’t invest directly in an index, you can invest in a fund that tracks an index. This is called an index-tracking fund. For example, if you wanted to invest in the S&P 500, you can buy SPDR’s S&P 500 ETF (SPY), Vanguard’s S&P 500 ETF (VOO), or alternatively iShares Core S&P 500 ETF (IVV). VOO has the lowest expense ratio of the three. Domestic and International Indexes In the United States today, the main index providers are: MSCI (Morgan Stanley Capital International) FTSE (the Financial Times Stock Exchange Group)   Standard & Poor’s (S&P 500) Dow Jones Each index provider uses its own criteria in selecting and weighting companies. When it comes to indexes that track markets outside of the United States index providers classify geographies differently. For example, FTSE classifies South Korea as a developed country, whereas MSCI classifies South Korea as an emerging market economy, putting it in the same index with China, India, and Brazil. This divergence in geographical classification may impact the risk and return of your portfolio if you are heavily invested in emerging markets. Choosing which emerging markets fund to invest in can translate to real differences in country exposure. Differences in Market Coverage Even if two indexes classify geographies similarly, be aware that they may not define large-, mid-, and small-cap segments the same way. Take the treatment of companies that are small in market capitalization, otherwise known as small-cap stocks, as an example. Traditionally, the FTSE All-World Index (an index of approximately 2,900 stocks in 47 countries) excluded small-cap stocks, whereas the S&P Global Broad Market Index, also a broad global index, included small-cap stocks in addition to large and mid cap companies. Furthermore, indexes may define smalls caps differently. For example, FTSE includes the smallest 10% of all securities in their small-cap exposures while MSCI, S&P, and Dow Jones cover the smallest 15%. An investor who is not aware of this difference may unintentionally create an unwanted overlap in a portfolio by obtaining the larger segments of the market from one provider and smaller segments of the market from another provider. What Makes a Good Index-Tracking ETF? As index-tracking ETFs become more popular, there are more and more that track the same index. However, this overlap doesn’t necessarily mean they’re created equal—some are better than others at exposing investors to their intended markets while reducing costs. So how do you know what to avoid and what to look for? Choosing a good fund is not just about the index—it’s also about what’s true of the fund that tracks it. In general, a good index-tracking ETF is accurate in tracking its underlying index, intelligent about managing turnover and trading, reticent to pass on capital gains generated internally, diligent in rebalancing, generally inexpensive to access, and transparent in its fee reporting. It’s important to understand each of these characteristics and how to measure them. Tracking Error: This is the standard deviation of the fund’s excess returns vs. its benchmark. Tracking Difference: Similar to tracking error, tracking difference is the annualized difference between a fund’s return and its benchmark’s return. A small difference indicates that the ETF has done a good job of mirroring its index. Expense ratio, rebalancing costs, cash drag, and dividend tax can all contribute to tracking difference. Fund Turnover: This is a measure of how frequently assets within a fund are bought and sold. Higher turnover leads to higher transaction cost. Fund turnover costs are not included in the expense ratio. They can represent a significant additional cost that reduces your long-term investor returns. Rebalancing: Whether and how often a fund changes its holdings to maintain established asset allocations. Rebalancing does not impact portfolio returns as much as it minimizes risks. Expense Ratio: This is the annual cost that a fund charges for managing assets. It does not include portfolio transaction fees and brokerage costs. Expense ratio is reflected in the tracking difference. There are also two expense ratios: gross expense ratio and net expense ratio. Gross expense ratio is the expense ratio before fee waivers and reimbursements. Net expense ratio is post fee waivers and reimbursements. If there is a big difference between the two expense ratios, it could be a sign that the fund’s expense ratio may increase once the fee waiver expires even though the investor is locked into the fund. Tax Cost Ratio: The reduction in a fund’s annualized tax return because of taxes on distributions. The degree of turnover, frequency of rebalancing, how reasonable the expense ratio, and transparency of fee reporting can be gleaned from an ETF’s prospectus. Good ETFs, in short, minimize unnecessary distortions and provide easier access for the everyday investor to invest in her desired market. S&P 500 Index and Funds That Track It, 2004-2015 How ETFs Reflect Index Composition Changes But what happens if the underlying index that the ETF tracks changes its constituents or even the methodology it uses to track indexes? How will the ETF provider respond? Recently, two index providers, MSCI and FTSE, made different decisions about including China A-shares in their core emerging market indexes. If you’re new to A-shares, they are shares that are traded on the biggest Chinese stock exchanges in local currency (Renminbi), and they have not been available to foreigners for purchase due to government restrictions.   Despite being the world’s second largest economy, China’s stock market has been difficult to access for foreign investors. Historically, foreign ownership of China A-shares have been limited to those who hold unique licenses that allow them to invest in domestically domiciled and listed Chinese companies. But China has made significant efforts in opening its market to international investors. License and quota approvals have been increasing at a rapid pace since 2001. Because of the recent developments in regulatory reform, market accessibility, and expansion of the stock market, FTSE recently decided to include China A-shares into its emerging market benchmark. Most of the time, when there is a change in the index, the associated ETFs mirror that change. This is true of Vanguard, a provider of funds that track some of FTSE’s indexes. When FTSE announced that it would include China A-shares in its Emerging Market Index, Vanguard followed suit by adding China A-shares to its Vanguard Emerging Markets exchange-traded fund, VWO. MSCI, another index provider, decided against including China-A shares in its global benchmarks as it awaits the resolution of several issues surrounding market access. EEM, the iShares ETF that tracks MSCI’s Emerging Markets Index, mirrored the decision of MSCI to not include A-shares. Wolf in Sheep’s Clothing: Active Indexes The examples we mention above involve passive index-tracking ETFs. However, there are ETFs that are active, which means they don’t track the performance of the index. These active ETFs have grown significantly in the last decade. They allow fund managers to change their allocations and deviate from the index as they see fit. Active ETFs tend to generate higher costs in the form of higher expense ratios, turnover, and taxes. At Betterment, our portfolios only consist of ETFs that are passive ETFs because we believe that active ETFs do not generate higher returns over the long term. Therefore, we don’t think their higher fees are necessary and justified. To screen out ETFs with higher fees and expenses, we identify categories of ETFs that are associated with higher costs and exclude them from our basket. An example is inverse ETFs. These ETFs are created for the purpose of profiting from a decline in the price of the underlying benchmark. The average expense ratio associated with inverse ETFs is around .99%, while those that are not inverse have an average expense ratio of .61%. Our algorithm screens out inverse ETFs automatically. For the same reason, we screen out active funds. One way to identify these active funds is to look at their weighting method, which tend to be weighted based on beta, volatility, momentum, or entirely proprietary. How Do A-Shares Affect My Betterment Portfolio? While FTSE’s composition change certainly affects the Betterment portfolio, the effect is rather small. The launch of two transition indexes will start out by weighting China A-shares at 5%. As an example, a 70% stock 30% bond portfolio at Betterment only has a .32% exposure to Chinese companies. However, the index change does signify the willingness and readiness of index providers to get broader market access to the second largest stock market in the world. The change allows investors to have exposure to a more global and comprehensive portfolio.

Currency Risk Does Not Belong in Your Bond Portfolio International bonds can help improve your portfolio’s performance, but leave currency bets to gamblers. When you buy things in a foreign currency—whether that’s goods and services as a traveler, or stocks and bonds as an investor—you are faced with a central issue: How far will your dollar go? Exchange rates ebb and flow on a daily basis, which creates currency risk. For the infrequent traveler, that may be an acceptable risk, but for the investor, the currency risk could wipe out his portfolio gains. Today, this is an increasingly visible issue for investors as the integration of global financial markets is making it easier for investors to access far-flung markets and asset classes. When foreign investments are denominated in a currency other than U.S. dollars, the returns you make on them must be translated back to American currency. That means an international fund’s performance, when reported in U.S. dollars, also includes the effect of exchange-rate movements. Individual investors are not immune to currency movements, either. If his or her own investments are issued in a foreign currency, he or she may lose if the exchange rate moves against them, even if the investment itself has a positive return. For example, if John is invested in Apple Inc. bonds that are denominated in the yen, and the yen depreciates against the dollar, when John converts from the depreciated yen back to the dollar, his investments may be worth less even if Apple sees great returns. Yet a well-diversified portfolio can help avoid that risk, allowing investors to tap the upside of diversification while managing risk associated with currency fluctuations. The Origin of Currency Risk Governing bodies around the world set economic agendas independently. Monetary policies, as a result, range from economic region to economic region, resulting in varying interest rates. Interest rates, in short, are the rate at which borrowers pay lenders. Countries use interest rate targets as tools to manage their own economies. For example, central banks can reduce interest rates to encourage investment and consumption in that country—or raise rates to deter borrowing. Interest rates directly affect currency exchange rates and thus create currency risk. While rates are being re-evaluated by countries, the good news is that rate changes do not work in lock step. For an investor who’s invested in bonds of different countries, the internationally diversified bond portfolio may allow investors to lessen their overall interest rate risk. Importantly, however, this exposure to currency risk is an uncompensated risk. Changes in exchange rates create return volatility without introducing additional expected returns. While rate changes may randomly add returns in your favor in the short term, the expectation should always be of zero return over the long term. It is true that currency moves can be profitable if you are on the right side of them. The “carry trade” involves borrowing from low-interest rate currencies to invest in high-interest rate currencies. This strategy has demonstrated it can be profitable over some periods of time.1 However, the same carry strategies exhibited large losses during the 2008 financial crisis, making the point that such strategies’ “tail risk” (risk of unpredictable losses) potentially cancels out their profitability during more normal times.2 How to Mitigate Currency Risk in Bonds There are two ways to mitigate currency risk: 1. Buy foreign securities issued in U.S. dollars. A U.S. investor who wants to invest in the bonds of the Mexican government, for example, can invest in bonds that are purchased, have income issued, and have principal returned in U.S. dollars. By doing so, he or she she is never exposed to USD/MEX currency risk. In contrast, a U.S. investor who purchases a U.S. bond issued by Apple Inc. but denominated in Japanese Yen (JPY) is exposed to currency volatility. So a U.S. investor investing in a U.S. company can still be exposed to currency fluctuations if the bond is denominated in another currency. 2. Hedge currency risk. Another way to mitigate currency risk is to put on a hedge. In the simplest terms, a currency hedge is insurance against a currency move in either direction, for or against you. A currency hedge technically involves two parties exchanging a set amount of one currency for another at a predetermined exchange rate and amount at a future date. When you hedge currency risk, you can remove currency risk from your investment… at a cost. The hedge itself costs something to manage and maintain. The cost depends on the currency being hedged—liquid developed currencies are generally easier and cheaper to hedge than emerging ones. In exchange for this cost, your investment will likely have lower volatility, as the currency fluctuations are removed. There are many ways to hedge currencies. These include forwards, swaps, futures, and options. All of these methods allow investors to lock in a set exchange rate today to eliminate potential exchange rate volatility that may arise in the future. To permanently hedge an investment, an investor must continually close contracts that have come due, and invest in new ones further into the future. This process is called “rolling” the contracts, and can have a small ongoing transaction cost. Hedge International Bonds, Not International Stocks Currency hedging, like most insurance, is not free, and so the benefits need to be balanced against the cost. If hedging costs you more than it benefits you, you shouldn’t do it. To find out, weigh the reduction in volatility against the incremental cost of buying the hedged (rather than unhedged) version of the ETF. A Vanguard study analyzed the impact of currency hedging on foreign bonds and stocks and found that hedging is beneficial for bonds but not for stocks.3 This is because of the different volatility characteristics of stocks and bonds, and their correlations with currency moves. Bonds, as an asset class, are typically less volatile than both stocks and currencies: Equity Volatility > Currency Volatility > Bond Volatility When you take a position in unhedged foreign currency bonds, the volatility of the investment will come predominantly from the currency fluctuations, not the bonds themselves. Research has shown that the volatility of unhedged currency fluctuations often overwhelm the diversification benefits that international bonds bring to a portfolio. In contrast, because currency risk is usually a very small proportion of volatility in foreign stocks, there is far less benefit from hedging the stock exposure. Compare the relative contribution of the currency component to the overall return and volatility in bonds and stocks: Impact of Currency Risk on Bonds vs. Stocks   Whether it’s stocks or bonds, currency does not contribute substantial returns. However, it has a substantial risk in terms of volatility, and all the more so when it comes to bonds. The increase in risk of not hedging bonds is significant and cannot be overlooked. Currency Hedging Reduces Volatility The graph above illustrates the volatility difference between international bond ETFs with currency risk versus their currency risk-free counterpart. Vanguard’s Total International Bond ETF (BNDX) hedges out the currency risk through currency forwards. In contrast, the iShares International Treasury Bond ETF, IGOV, keeps the currency volatility intact. The daily volatility inherent to IGOV is more than twice that of BNDX. The sharp increase in volatility because of currency fluctuations applies to emerging market ETFs, as well. The Vanguard emerging market government bond ETF, VWOB, eliminates currency risk by investing in dollar denominated government bonds issued by emerging markets. The iShares emerging markets bond ETF, LEMB, likewise tracks emerging market sovereign bonds but includes currency risk by investing in bonds denominated in the local currency. The local-currency version has nearly twice the volatility of the dollar denominated version. Balancing Cost and Volatility Reduction Volatility is only part of the equation. The other aspect of making the decision about hedging is the cost of hedging. The below chart illustrates the additional cost of the hedged ETF and the volatility reduction associated with using a hedged ETF. As is seen with the Vanguard Total International Bond ETF, BNDX, the ETF without the currency risk is not always the most expensive. Although BNDX eliminates the currency risk, it also charges 15bps less in terms of expense ratio cost. The reduction in currency volatility associated with stocks, on the other hand, is less drastic despite the higher cost of hedging. If you are not as familiar with the funds, see the bulleted list below. Volatility Reduction and the Additional Cost of the Hedged ETF Asset Class Hedged Fund Expense Ratio Unhedged Fund Expense Ratio Additional Cost of Hedged ETF Volatility Reduction Developed International Stocks 0.70% HEFA 0.09% VEA 0.61% -3.40% Emerging Market Stocks 1.46% HEEM 0.15% VWO 1.31% -5.60% Developed International Bonds 0.20% BNDX 0.35% IGOV - 0.15% -7.90% Note: HEFA, HEEM have fee waivers until 2020. We are using the expected long-term expense ratios. HEFA: iShares Currency Hedged MSCI EAFE ETF tracks the performance of large and mid-cap equities in Europe, Australasia, and the Far East. VEA: Vanguard FTSE Developed Markets ETF tracks the performance of the FTSE Developed ex North America Stock Index. The companies are mostly large and mid-cap companies. Canada and the U.S. are excluded. VEA is in the Betterment portfolio. HEEM: iShares Currency Hedged MSCI Emerging Markets ETF tracks the performance of large and mid-cap emerging market equities. The currency exposure is offset through currency forwards. VWO: Vanguard FTSE Emerging Markets ETF invests in large-, mid-, and small-cap equities in emerging markets. VWO is in the Betterment portfolio. BNDX: Vanguard Total International Bond ETF tracks the performance of the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). BNDX is in the Betterment portfolio. IGOV: iShares International Treasury Bond ETF tracks the performance of an index of non-U.S. developed market government bonds. Currency Risk at Betterment If you invest with Betterment, we have designed your  bond portfolio to mitigate currency risk. We believe that the volatility attributed to currencies is not a compensated risk, and so, when affordable, it should be avoided. Whether we eliminate the risk through hedging or through a direct purchase of U.S. denominated bonds largely depends on the geography of the bond ETF. (See our interactive graphic to determine the exact geographical allocation of your portfolio.) Geography is an important factor to take into account when determining the best way to mitigate currency risk. While it’s prohibitively expensive to hedge emerging investments due to the larger number of currencies and the inefficiency of those markets, a basket of developed market currencies can be hedged efficiently. Because of these considerations, your international developed-country bond ETFs at Betterment are hedged at the ETF level (BNDX). BNDX hedges currency fluctuations inside of the fund. In this case, the fund purchases one-month forward contracts to exchange currencies in the future at today’s rates. If rates move between now and then, the investor is not exposed to those moves, because the value of the forward contract will offset the moves in currency. In contrast, your emerging market bonds are denominated in USD (VWOB, EMB, PCY) because of the cost considerations when it comes to hedging multiple emerging market countries. While the bonds are issued from developing countries, both their value and interest is defined in USD, removing concerns about currency risk. 1Burnside, Craig, Martin Eichenbaum, and Sergio Rebelo. "Carry Trade and Momentum in Currency Markets." Annu. Rev. Fin. Econ. Annual Review of Financial Economics 3.1 (2011): 511-35. Web. 2 Lustig, Hanno, and Adrien Verdelhan. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk." American Economic Review 97.1 (2007): 89-117. UCLA Publications. UCLA, 2007. Web. 16 June 2015. https://www.econ.ucla.edu/people/papers/lustig/lustig303.pdf. 3   Thomas, Charles, and Paul Bosse. "Understanding the ‘Hedge Return’: The Impact of Currency Hedging in Foreign Bonds." Understanding the 'Hedge Return': The Impact of Currency Hedging in Foreign Bonds(2014): n. pag. Vanguard Research, 1 July 2014. Web. 1 June 2015. https://personal.vanguard.com/pdf/ISGHC.pdf. * Volatility based on MSCI EAFE (hedged and unhedged) indices from Figure 4: Average rolling 12-month standard deviation over 10 years (7/1/04–6/30/14). Kittsley, Dodd, and Abby Woodham. Purer Return and Reduced Volatility: Hedging Currency Risk in International-equity Portfolios. N.p.: Deutsche Asset and Wealth Management, Sept. 2014. PDF. Deutsche Asset calculations ** Volatility based on MSCI Emerging Market (hedged and unhedged) indices from Figure 4: Average rolling 12-month standard deviation over 10 years (7/1/04–6/30/14). Kittsley, Dodd, and Abby Woodham. Purer Return and Reduced Volatility: Hedging Currency Risk in International-equity Portfolios. N.p.: Deutsche Asset and Wealth Management, Sept. 2014. PDF. Deutsche Asset calculations * Volatility based on MSCI Barclays Agg (hedged and unhedged) indices from Figure 4: Average rolling 12-month standard deviation over 10 years (7/1/04–6/30/14). Kittsley, Dodd, and Abby Woodham. Purer Return and Reduced Volatility: Hedging Currency Risk in International-equity Portfolios. N.p.: Deutsche Asset and Wealth Management, Sept. 2014. PDF. Deutsche Asset calculations This article originally appeared on ETF.com.

Betterment Customers Stay the Course, Steer Clear of Behavior Gap Research from Betterment’s behavioral team shows that most investors with Betterment achieve full investment returns and do not attempt to time the market. Betterment strives to help customers reach Behavior Gap Zero—a way of saying that bad behavior doesn’t interfere with achieving optimal returns.1 To help our customers reach that goal, we seek to understand their motivations and decisions, and how those actions can make an impact on their investment returns. However, measuring that impact is a multifaceted task, so we are starting with one simple question: How do allocation changes, or changing the weight of stocks to bonds in a goal, affect returns? Under what circumstances are customers making allocation changes, and are customers improving or reducing their returns with these changes? Key Finding: Market Timing Hurts Returns After sifting through the data, we found these key points: In 78% of accounts, customers made less than one allocation change per year, consistent with occasional changes in financial circumstances. Across all accounts, 67% of customer accounts have Behavior Gap Zero. Account holders who are more active appear to make allocation changes in reaction to the market, and underperform as a result. We observe an average behavior gap of 22 basis points across all accounts; however, we noted a skewed distribution, and 74% of accounts are better than this average. Below, we first detail the ways our smarter technology is making allocation selection easier than ever for investors. Second, we review the results of our behavioral research. Together, these illustrate the unique ability and dedication we have at Betterment to understanding and assisting with the behavioral components of investing. What makes this data unique? Most existing studies of the behavior gap in investing look at cash flows into and out of different funds. This is a necessity because most investing platforms require that an investor move funds from one vehicle to another to adjust risk. Existing studies generally show that those cash flows mistime the market, on average: rushing in after periods of success and retreating when returns are down. But cash flows are a muddy measurement of risk preferences. Investors may move assets because of fees, manager reputation, to consolidate investments, or because they need the money to spend. For investors, adjusting risk allocation at Betterment is as simple as dragging a slider to change the proportion of stocks and bonds within the portfolio. As a result, we can focus on how investors change allocations while filtering out other confounding changes, which allows us to measure the resulting impact on returns with great clarity. Automated Allocation: A New Paradigm We understand the reality of changing financial circumstances and accordingly, we make our allocation change as easy and efficient as possible. Adjusting portfolio allocations has traditionally been full of frictions: phone calls to advisors, fees for trades, and uncertain tax consequences. Betterment customers experience none of those frictions, and as a result, have a new level of freedom and power to adjust their allocation to meet their financial needs. Imagine a career change that pushes plans to buy a house back by three to five years, or a family change, such as a divorce or death, that makes retiring a few years later seem like the right decision. These changes in the time horizon of the investing goal mean that stock allocation should be increased accordingly. On the other hand, if an investor needs the money sooner than originally expected, more bonds are appropriate to minimize uncertainty around the withdrawal date. Betterment reduces certain costs and barriers to allocation changes (e.g., fees, fund choices, taxes) so that our customers have the right portfolio for their financial situation. What we don’t want to encourage, however, are allocation changes in response to market movements or guesses about what the market will do in the future. As long-time Betterment customers know, we discourage market timing at every turn. With this research, we wanted to answer two questions: Are customers trying to time the market? If so, how is that affecting their returns? Examining Customer Behavior The data below shows allocation changes as they coincide with market performance (dark blue line) during just the last two quarters of 2014. Each bar shows the average direction and magnitude of allocation changes over the previous seven days. Note that these averages include only the small number of customers who made a change over the 7-day period— typically five out of every 1,000. When focused on the tiny subset of customers who were active, we do see some behavior that looks like market timing. How do we know this? If these investors were making allocation changes purely in response to idiosyncratic changes in their financial circumstances, the average change would stay close to 0% and we wouldn’t see any correlation with market performance. Allocation Changes and Market Performance Data Shows Subset of Active Users Only   We see that changes followed the market to some degree in the second half of 2014, but what about a more systematic trend? If we use all of our data since 2010, we can look for such systematic patterns.2 The plot below shows the proportion of allocation changes moving toward stocks or bonds based on market performance in the preceding week. We see that when the market is up between 0% and 3% in the preceding week, the average change increases the stock allocation by 6%. When the market is down more than 2% in the preceding week, the average allocation change is toward bonds by 5%. Remember, more than 99% of customers do not make an allocation change during a given 7-day period, so this pertains to the decisions of the small number who do make changes. Proportion of Allocation Changes Moving Toward Stocks or Bonds Based on Market Performance   How is this affecting returns? Perhaps these active customers are actually improving their returns by making changes? To measure the effect of allocation changes on a customer’s returns, we compared the returns the customer experienced as a result of actual allocation choices to an individualized benchmark. For the benchmark, we used the average time-weighted allocation chosen by the customer. Then, we compared each customer’s actual returns resulting from actual allocation levels over time to the benchmark: the returns that would have resulted if the customer had been at the average allocation constantly from day one. In both cases, we used time-weighted returns, so cash flows into or out of the account did not have an effect. As an example, imagine a customer who funds a five-year home-buying goal and sets the allocation to 70% stocks. After one year, the customer increases the allocation to 95% to chase the performance of surging U.S. equity markets. A more volatile second year makes the prospect of losses more salient, and the customer sets the allocation back to 70%. By the end of the third year, the account had earned 18%. In this analysis, we compare that actual 18% time-weighted return to a hypothetical account with a constant 78.33% allocation over the same period (the time-weighted average of 70, 95, and 70). By doing this analysis on every account, we find making allocation changes reduces returns, on average. By doing this analysis on every account, we find making allocation changes reduces returns, on average. Across all Betterment accounts, the mean gap between actual returns and the average allocation returns was 22 basis points. However this includes all the accounts that made no allocation changes, and whose gap would by definition be zero. Looking only at the accounts that made at least one allocation change, the average gap is 41 basis points. The figure below shows that each additional allocation change (up to four) increases the average behavior gap by about 16 basis points. Only 22% of accounts have made more than one allocation change per year. Nearly half have never made even one, so there is no possibility of a behavior gap, as we define it. Overall, two-thirds of customers have no gap, and three-fourths have a behavior gap smaller than the 22 basis point average. Behavior Gap and Allocation Changes   IRAs Are Different Interestingly, we see customers making fewer allocation changes in their retirement goals in IRA accounts, and their returns are closer to the ideal as a result. Betterment customers make 48% fewer allocation changes in their IRA accounts and see 50% smaller behavior gaps, on average. We see two potential explanations for this difference. First, it’s likely that our customers’ retirement horizons don’t change very often, so there are fewer legitimate allocation changes than in many of the shorter-term taxable savings goals. Second, the findings are consistent with prior research showing less activity in retirement accounts, possibly because they are perceived as more “off limits.”3 It’s worth noting that a preference for changing allocation inside a taxable account versus an IRA, all else being equal, is highly tax-inefficient behavior, as investors are not taxed on realized gains inside an IRA. The returns analyzed here are not after-tax, so the findings actually understate the gap that results from frequent trading in a taxable account, which we’ve written about in the past. If an investor is going to market time (and we advise against that!), doing so in a taxable account is particularly ill-advised, as compared to an IRA. How does this apply to individuals? Does this mean that an investor should never make an allocation change? Not at all. If an investor’s financial goals or constraints have changed, an allocation change may be the right thing to do. In that case, we recommend going to the Advice tab in your Betterment account, entering the new time horizon or target balance, and adjusting accordingly. Using allocation changes as a tool to try to time the market, or in reaction to periods of bullish or volatile markets, is where we see trouble. These kinds of changes only make sense if an investor know exactly what the markets will do next, and that is not something most of us should be betting on. 1 The “behavior gap” is a term coined by financial planner and journalist Carl Richards and has become a popular way to refer to the loss of investor returns due to bad timing decisions. 2 While the average market movement has been upward over the period Betterment has been available to investors, it has been marked by drawdowns of up to 20% in the S&P 500 since 2010. 3 Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. The Journal of Finance, 55(2), 773-806.

The Real Cost of Cash Drag A broker that’s selling you cash as an investment should make you think twice, especially when it’s not in your best interest—but it is in theirs. Cash has a significant chance of a real negative return over time due to inflation risk. Cash assets can present a conflict of interest when the investment manager is advising cash and then re-investing it for its own revenue. For the goals you set at Betterment, we use fractional shares to invest every cent you deposit. Every dollar—down to the penny—is fully invested in a diversified portfolio of stocks and bonds. It’s pretty plain and simple: Cash is not a good investment for the long term. After taxes, inflation, and its current expected return (zero), you are actually losing money when you hold cash in your investment portfolio over the long term. In other words, cash is a drag on your returns. If you must hold excess cash, you should do so in a vehicle that helps to mitigate the effects of inflation and is tax-efficient. We are hardly the only investment manager to take this stance. In a research paper published in Financial Analysts Journal last year, Vanguard founder John Bogle cited cash drag as one of the ways investors are not making the most of their investments.1 Cash Costs You Returns Certain investment services require you to hold cash in your account. In practice, your cash holdings could range from a tiny fraction of your balance to a substantive allocation in your portfolio. Across the universe of U.S. equity mutual funds, Morningstar Inc. calculated an average cash weighting of 3.2%.2 As Bogle noted in his paper, index-tracking funds tend to carry a lower cash load than active funds. One recent example is with Schwab’s new automated portfolio, one of the latest imitators of Betterment’s automated investing technology. Its new offering requires a cash position from a minimum of 6% to as much as 30% cash, according to Schwab’s disclosures.3 Then there are other automated services and traditional managers that force you to keep a small amount of cash on the side because they aren’t able to do fractional share trading. We’re not fans of either scenario, but the first one is especially troublesome. For the smart investor, there are several red flags here. Cost No. 1: You’re not earning returns, and are losing money. First, the most obvious issue is that cash is simply not a risk-free investment and doesn’t belong in any moderate to long-term investment portfolio. It currently returns almost zero and when you factor in inflation, can lose you money. That means the more cash in your portfolio, and the longer you invest, the less your portfolio may be worth compared to a portfolio without cash. Be wary of any advisor who talks about cash without adjusting for inflation. While a small portion of cash, for example an allocation of 6%, may seem like an insignificant amount, it still can have a significant drag on returns. This is especially true for a long-term investor who should be in a high-stock allocation. For illustrative purposes, let’s have a look at Schwab’s recommendation for “Investor 2,” a 40-year-old with moderate risk tolerance. The portfolio is 61% stocks, but you’re forced hold 10.5% cash.4 A Betterment portfolio at 61% stocks, with no cash drag, has an expected annual return of 5.8%. Let’s generously assume that cash returns 1% annually (currently, it’s much less than that). With 10.5% of your assets on the sidelines, the effective cost would be 0.5% in lower expected returns every year. The Cost of “Cash Drag” on a $100,000 Investment Over the next 30 years, having 10.5% cash in your portfolio will cost you $73,417 compared to the same portfolio with zero cash drag Cost No. 2: It’s a conflict of interest. A small amount of cash in your portfolio resulting from an inefficient trading structure is one thing. But an entire asset dedicated to cash holding should raise eyebrows. This is particularly important when it comes to a portfolio that is billed as “free.” For example, Schwab is marketing its new portfolio as “free,” yet there exists a very real underlying cost hidden in the allocation structure. You, the individual investor, are paying a hidden fee via the cash allocation you are forced to hold. (We’re not the only ones to point this out.) How does that work? In Schwab’s fine print, Schwab is explicit that it will use your cash, held in its company’s bank, for its own investing, providing them with revenue and reducing your expected returns.5 Herein lies the conflict of interest: As a customer, you now have a portfolio manager who is incentivized to have you hold more cash than might be optimal for your investment strategy—simply because they make money on it. Schwab even acknowledges this conflict of interest in its recent filing with the U.S. Securities and Exchange Commission (SEC), specifically calling out that not even other Schwab entities would allocate so much of a portfolio to cash: In most of the investment strategies, the percentage of the Sweep Allocation is higher than the cash allocation would be in a similar strategy in a managed account program sponsored by a Schwab entity or third parties. This is because, as described below under “Fees,” clients do not pay a Program fee. (page 3)5 This conflict can have some unexpected consequences. For instance: such an allocation to cash might feel intuitively sensible because of a mental association with a “rainy day” fund. We’ve written before about how you can do better. However, let’s assume you do want a cash safety net. With an automated, enforced cash allocation such as Schwab’s, you can't withdraw just the cash if a rainy day does come. Since the cash allocation is the backdoor method by which Schwab gets paid, the service would rebalance you back into the target cash allocation, selling securities in the process, and possibly triggering capital gains. From the same filing: [Schwab] may terminate a client from the Program for withdrawing cash from their account that brings their account balance below the minimum… (page 4)6 If you want some cash on the side, this is not it: you’ll need another cash stash in your bank account, both costing you returns over the long term. Cost No. 3: You can better manage risk with bonds. “But cash is safe,”’ I hear you say. “It helps stabilize the portfolio.” “Actually so do bonds,” I say. “And they don’t reduce your expected returns like cash does.” The vast majority of the time, you’ll be better off using bonds rather than cash. You can achieve both the lower drawdown risk while protecting against inflation risk with high-quality inflation-protected bond funds, such as Vanguard Short-Term Inflation-Protected Securities (VTIP). The chart below depicts the rolling two-year real returns of a basket of five-year Treasury bonds versus a cash savings account. When assessed properly (at a portfolio level), Treasury bonds have dominated cash for any non-immediate time horizon. Even through the 2008 financial crisis, you would have been better off investing in Treasury bonds than cash. Critically, bonds tend to rally when stocks are crashing, a process called the “flight to quality.” Moreover, it’s not just the frequency with which bonds win, but also the extent of the advantage. Let’s look at the cumulative performance of a portfolio of stocks and Treasury bonds versus a portfolio of stocks and cash savings since 1955. It turns out that investing in a $100,000 portfolio of stocks and Treasury bonds in 1955 would have outperformed the same stock portfolio with cash by $44,013. Cash Drag Reduces Portfolio Returns Bonds beat cash by $44,013 on $100,000 initial investment Cost No. 4: It’s not efficient. Lastly, let’s talk about efficiency. As you may know, trading on an exchange only happens in round, whole share amounts. The result is a little bit of cash permanently left on the side. This is not an efficient way to do things. Imagine that you have a portfolio with 12 ETFs, and one share of each ETF costs $100. Now, you make a $90 deposit (or your ETFs pay a total of $90 of dividends). With a platform that only uses whole shares, you cannot use any of that cash—read: zero dollars—to add to your investments because it’s not enough to buy a single share of anything. So that 90 bucks will just remain uninvested, waiting for additional cash, before you can buy even a single share. As deposits and dividends flow through this account over time, it will always have some amount of pesky cash remainder sitting there. This is sub-optimal investing. At Betterment we use fractional shares, which means you invest down to the penny. In the end, it’s important to understand the role investing has in your financial plan—and the role cash plays. When you pay for investments, whether that’s through an expense ratio or a management fee, you’re paying for the potential to earn returns, not to lose money with cash. If you’re comfortable keeping cash on the side, remember, you can always use a savings account. The results above are hypothetical and for illustrative purposes only. Investing in securities always involves risks, and there is always the potential of losing money when you invest in securities: even Treasury bonds. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature. Before investing, consider your investment objectives and Betterment’s charges and expenses. 1https://johncbogle.com/wordpress/wp-content/uploads/2010/04/FAJ-All-In-Investment-Expenses-Jan-Feb-2014.pdf 2https://www.investmentnews.com/article/20150206/FREE/150209947/low-mutual-fund-cash-levels-not-telling-the-whole-story 3 https://www.adviserinfo.sec.gov/Iapd/Content/Common/crdiapdBrochure.aspx?BRCHRVRSNID=277224 (page 2); https://intelligent.schwab.com/public/intelligent/insights/whitepapers/role-of-cash-in-asset-allocation.html 4 Under “Can you give me an example of what these asset allocations look like?” https://intelligent.schwab.com/public/intelligent/about-intelligent-portfolios  5 “Schwab Bank earns revenue based on the interest we receive by investing the cash, minus the interest paid on the deposit and the cost of FDIC insurance (which Schwab pays).” https://intelligent.schwab.com/about-sip.html 6 Schwab goes into more detail in its disclosure brochures: “Schwab Bank earns income on the Sweep (i.e., cash) Allocation for each investment strategy. The higher the Sweep Allocation and the lower the interest rate paid the more Schwab Bank earns, thereby creating a potential conflict of interest. The cash allocation can affect both the risk profile and performance of a portfolio.”